As employers struggle with the cost of providing health coverage to employees, more businesses are turning to private health insurance exchanges. Inspired by public exchanges under the Affordable Care Act (ACA), in a private exchange, a company’s employees or retirees can compare and select from a variety of health plans. The employer contributes the same amount of money toward the premiums for each participant, leaving the employees to make up any difference.
Large companies such as IBM, Walgreens and Time Warner have all recently implemented private exchanges for their employees and/or retirees. In 2015, the number of participants in private exchanges doubled from 3 million to 6 million, and that is projected to grow to 40 million by 2018.
Employers can control many aspects of a private exchange, such as how to fund it (e.g., Section 125 cafeteria plans or Health Reimbursement Arrangements), whether to offer other benefits alongside the medical plan (e.g., dental or vision coverage), instituting a wellness program to reward employees for healthy choices, and others. Almost all private exchanges are fully insured, so employers can better control and predict their costs, but self-funded plans can also be offered.
Private exchanges can potentially help businesses control costs, comply with the employer-mandate under the ACA and give employees more freedom over their benefits. But private exchanges may not be right for every company, and they can include complex compliance issues. For example, the Employee Retirement Security Act (ERISA) may not apply to all plans on all exchanges, businesses may have to create numerous Summary Plan Descriptions, and an employer’s scope of fiduciary duties under ERISA is not as clear-cut as with a traditional health plan.
Employers considering a private health insurance exchange for any group of employees or retirees should consider their options. If a private exchange is desired, it must be carefully designed to ensure compliance with the ACA, ERISA and the Internal Revenue Code.