Defined Contribution Health Plans Overview
At Alternative Benefit Consults, LLC we know that recruiting and retaining key employees is important to every company and a company’s health benefit program is a key part of the compensation they offer to their employees. Due to the rising costs of traditional employer-sponsored health insurance, Defined Contribution Health Plans are gaining popularity in the U.S.
Many of our clients are asking, what is an defined contribution health plan, and what can this do to help my business? We are going to try to answer these questions in this article, lets start off with the most important question that is usually asked.
What is a Defined Contribution Health Plan?
Rather than paying the costs to provide a specific group health plan benefit (a “defined benefit”), employers fix their costs on a monthly basis by establishing a Defined Contribution Health Plan.
The general concept of a Defined Contribution Health Plan is that a company gives each employee a fixed dollar amount (a “Defined Contribution”) that the employees choose how to spend. Typically, employees are allowed to use their Defined Contribution allowance to reimburse themselves for individual health insurance costs.
Defined Contribution Health Plans are an affordable alternative to employer-sponsored group health insurance plans. Defined Contribution Health Plans by themselves are not health insurance plans.
Defined Contribution Health Plans are programs that allow employees to be more involved in their healthcare choices. With a Defined Contribution Health Plan, employees are responsible for selecting an individual health insurance plan and making payments out of their own finances.
Defined Contribution Health Plans – Pros for Employers
The four main pros of Defined Contribution for small businesses are: controllable costs, more time, tax savings, and employee recruiting and retention.
Controllable Costs: With Defined Contribution, the company sets and controls the cost of health benefits. Unlike traditional group health insurance, there are no minimum contribution amounts. Additionally, the company owns the allowance funds and the benefits are entirely employer-funded. Reimbursements are only issued to employees once they show proof of their expense. And, when the employee leaves the business, any unused funds generally stay with the business.
More Time for Strategic Work: Defined Contribution Health Plans reduce the administration time of health benefits. Using the right Defined contribution software administrator, managing health benefits takes 5 minutes per month online.
Tax Savings: By using a Section 105 Plan as the foundation of the Defined Contribution Health Plan, companies see tax savings. Employers can deduct reimbursements as a business expense, and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%).
Recruiting & Retention: Many companies struggle to afford group health insurance, or cannot meet participation requirements. Offering a Defined Contribution Health Plan enables a company to offer (and advertise) health benefits when recruiting key employees. It also shows employees that the company cares about employees’ healthcare.
Defined Contribution Health Plans – Pros for Employees
The three main pros of Defined Contribution Health Plans for employees are: cost savings, choice of plans, and plan portability.
Cost Savings: Individual health insurance plans, on average, cost 20% – 60% less than group health insurance plans. Eligible employees are able to access discounts on their health insurance with the federal health insurance tax credits. And as an additional cost savings to employees, Defined Contribution reimbursements are generally excluded from employees’ gross income.
Choice of Any Insurance Plan: With Defined Contribution Health Plans, employees choose the individual health insurance plan best for them, including the network of doctors. Employees can choose from any carrier and any type of plan (HMO, PPO, HDHP, etc.). Employees can purchase a plan through the new Health Insurance Marketplaces, through a broker, or directly from an insurance company. Additionally, employees can use their Defined Contribution allowance to cover the cost of supplemental coverage like dental or vision insurance.
Insurance Plan Portability: With Defined Contribution, employees purchase individual health insurance plans. Since individual health insurance plans belong to the employee (not to the company), the plan stays with employees if they leave the business.
Change is Hard: Transitioning to a Defined Contribution Health Plan is a significant change in how companies offer health benefits, and how employees receive them. Even with all of the employee benefits listed above, it still means employees take on a new responsibility of managing their own health benefits. Employees become health insurance consumers (just like they are car insurance consumers).
What makes all the difference?
Work with an insurance broker to help employees choose individual health insurance policies, and choose a Defined Contribution Administrator that will help educate, train, and support employees on their new health benefits.
For more information on Defined Contribution Health Plans or any other insurance related question, please call us at (540) 548-3484 or visit our website
Credits: information credited to ZaneBenefits