Earlier this week in the post on the wide amount of state discretion in the ACA an interesting and valuable comment was made by Ohio Mom that I want to engage on a bit more:

IANADavidAnderson but my suspicion is that this is the first step to doing to employer-provided health coverage what was done to defined-benefit pension plans. You’re going to end up with a health coverage version of a 401k.

In my opinion, employer sponsored insurance (ESI) is already a kissing cousin to a defined contribution plan than a defined benefit plan when we look at ESI offerings over a several year period.

My parents are retired. My parents have two very different retirement funding streams beyond the baseline of Social Security.

My dad has a union backed defined benefit plan. He gets a direct deposit of $XXX per qualified work year per month for the rest of his life and if he dies before my mom, she gets .67(XXX) per qualified work year per month for the rest of her life. The benefit dies with them. The union pension fund is currently over-funded (the construction actuarial tables understate mortality for the cohort of folks who had significant pre-OSHA/pre-EPA careers, so it will be interesting/scary when more cohorts like my Dad start to retire when most/all of their work years are post-OSHA) as the union fund is on the hook for longevity surprises and market shocks. If the retiree cohort dies quicker than projected OR the markets do better, my parents get no new upside but they also don’t face any downside. My dad effectively signed a 50 to 70 year contract for his pension benefit.

My mom has a 401-K. She explicitly contributed to it during the 20 years she spent at a particular employer. Her employer kicked in their contractually obligated match. The employer had a legal obligation to make sure the promised payments cleared and that the advisors were not complete, total and blatantly obvious frauds that a 3 year old could check. Once the matching and lump sum payments landing in my mom’s account, her employer had no further obligations. The matching rate and lump sum payments could and did vary by year and by who owned the corporate entity. My mom bears all the longevity risk and all the market risk. If both my parents die before her 401-K is empty, the remaining benefits can be passed along. If the 401-K is empty before mom and dad are dead, they are SOL unless my siblings and I can step in.

Employers sign short term contracts for health insurance. Most employer health insurance contracts are between one to three years with a few four and five year contracts. Unless there is a specific contract, there is no obligation for an employer to offer the same plan at a predefined price schedule to employees for one, three, or fifty years in a row. Instead, the benefit is re-adjusted every year. If the employer believes that they are spending too much on insurance and insurance is not a marked labor market differentiation, they have numerous ways to change the benefit while still offering some form of insurance in the next year.

An employer can reduce costs by shifting from a PPO to an HMO, or going from a broad network to a narrow network or a network with multiple tiers. An employer can move from an inefficient insurer to an efficient insurer. An employer can lower their total costs by shifting from a low deductible, high actuarial value plan design to high deductible, low actuarial value plans. All of these changes happen on a frequent basis. Employers offering insurance have very few obligations over time.

An HRA arrangement like that in the proposed rules just moves the behind the scenes decision making that is barely noticed on Box 12-DD of an employee’s W-4 and makes it explicit. I don’t think it moves employer sponsored insurance from defined benefit to defined contribution as it is, in my opinion, far closer to defined contribution in reality than it is to a defined benefit plan once we get past a single contract year.