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The 401(k)-tization of Healthcare

December 1, 2017

The 401(k)-tization of Healthcare

As we enter 2018, employer-sponsored healthcare plans will again face long term uncertainty due to a political landscape that is ever changing. As they have for nearly 30 years, employers will continue to walk the tightrope between maintaining value for employees and maintaining profit margins as health plan costs continue their never-ending upward trend. Over the past five years, we have been marching down a road of Federal, Public, and Private Healthcare Exchanges, enhanced by the expansion of Federal/State Funded Medicare programs. While the Republicans discussed the repeal of the new Federal Exchange, the Democrats were discussing the possibility of a single payer system, all of which were to be the “future of benefits delivery.” However, today, with Federal funding of under extreme pressure and the most recent repeal of the individual mandate, the “future of benefits delivery” looks as uncertain today as they did certain just 36 months ago.

While employers have assumed the burden of long term healthcare inflation, employees have been impacted as hourly compensation remains stagnant and benefit contributions continue to increase for less what is a perennially reality……less and less comprehensive core healthcare coverage.

Confronted with a familiar future, both employers and employees continue to look for new ways to address these same issues. Beyond the traditional employer-sponsored healthcare plan, many employers are looking at voluntary benefit programs, such as accident, critical illness and hospital indemnity insurance and employer/individual tax advantaged funding programs (FSA, HRA, HSA, etc.) to help employees cover out-of-pocket costs, but these are not long-term solutions.

A Novel Approach circa 1978: Employer Sponsored, Self-Directed, Defined Contribution, Retirement Plan: To many, the healthcare cost crisis of the past 30 years, looks remarkably similar to the retirement crisis of the 1970’s with one similar healthcare solution has emerged over the past 30 years.

Prior to the advent of the employer sponsored, self-directed, defined contribution, 401(k) retirement plan, many employers would offer their long-term employees traditional defined benefit pension plans. In fact, for most of the 20th century, the prevailing practice was that workers should be compensated in retirement for their years of work as employees tended to stay with the same company for the majority of their careers. Over the decades, as employees entered retirement, the defined benefit pension plans became a burdensome liability for many companies. These defined benefit plans, funded or in many cases underfunded entirely by the employer, became unsustainable as the financial crisis of the 1970’s began. In order to deal with this crisis and protect employees from pension defaults, in 1974 Congress passed the Employee Retirement Income Security Act (ERISA) which mandated that companies both fund and insure such defined benefit pension obligations and set up and insurance mechanism through the Pension Benefit Guaranty Corporation (PBGC).

In 1978, in an effort to expand company sponsored retirement alternatives, the Revenue Act (of 1978) introduced IRS Code Section 401(k) allowing rank and file employees to defer a portion of annual income as deferred compensation. On January 1, 1980, Section 401(k)’s permanent provisions to the Internal Revenue code allowed the use of salary reductions/deferrals as a source of employee retirement plan contributions. So, what did the 401(k) changes to the tax code provide employees? 

  • Within reason, it allowed employees the freedom to select and manage their own retirement investment options.
  • It allows contributions on a pre-tax basis thus reducing the amount of tax one pays the year that is deferred.
  • These plans/funds were portable so as employees change jobs, their 401(k) plans can be rolled over into IRAs sheltering earnings on a tax deferred basis.
  • Access to funds as there are generally loan provisions, such that employees may borrow against the balance.
  • And while withdrawals are permitted, they come with a significant penalty.


The employer for its part, began facilitating employee retirement savings through employee payroll deductions, corporate matching programs, providing cost effective plan administration and monitoring/managing plan investment options.

A Possible Solution circa 1978? As a small employer, we sit in the front row of the healthcare chaos spending more than $25,000 in 2018 to provide employees access family coverage. With the chaos at both the Federal and State levels, like many other employers large and small, we will again search for meaningful cost-effective alternatives as we look for ways to meet the challenge of creating exceptional value to attract and retain employees.

Is it time for the 401(k)-tization of employer sponsored healthcare benefits? Is it possible we are at or near a similar inflection point in the delivery of employee benefits? With the increased popularity of employer-sponsored high deductible healthcare plans, expansion of employer/individual tax advantaged funding methods (HRA, HSA, FSA, etc.) and the early stage expansion of both federal and private healthcare exchanges, the time that will define contribution employer “sponsored” healthcare plans is not far in the future. Further, the health plan delivery model has indeed changed over the past five years. With the emergence of Federal, State and Private Healthcare Exchanges, while not perfect, did in fact provide a health plan delivery platform for what might be the next revolution in benefit plan delivery circa 1978…401(k)-tization.

“Dear Employee: enclosed is a check for $25,000 with access to a high quality Federal, a State, and or a Private Benefits Exchange…Shop for the benefits that you believe are best for your family.” As health insurance costs continue to rise and employers find it increasingly it difficult to offer their employees valuable insurance plans, we need to try something different. In the coming years, employers may explore a more flexible model whereby employees are given a defined dollar amount and determine what healthcare coverage is most suitable for them in the marketplace……the “401(k)-tization of healthcare plans.” While many may see this global shift requiring a new blueprint for managing, communicating and delivering global employee benefit programs, we simply see this trend as an acceleration towards a new tier of employer-sponsored voluntary benefits that will include healthcare.

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