Due to increasing complexity and regulation, more and more employers are looking for innovative methods for providing health insurance to employees in an affordable manner. A defined contribution health plan helps employers accomplish this goal and is becoming an increasingly popular alternative to funding traditional group health insurance.
Because of new regulations requiring guarantee-issue and affordable policies provided through individual health insurance marketplaces, defined contribution plans now offer a cost containment solution for businesses which balances employer and employee needs.
What Is a Defined Contribution Health Plan?
With a defined contribution plan, employers contribute a fixed dollar amount toward employees’ health insurance premiums. Depending on how the benefit is structured, employees can use this “defined contribution” toward purchasing a personal health insurance policy or offsetting the cost of the health insurance premium of an employer group plan.
The shift to defined contribution strategies is similar to what has been going on for some time in the retirement plan space. Employers have been shifting from pension plans (a defined benefit) to 401(k) retirement benefits (a defined contribution), and saving significantly because of this move. So it makes sense to apply the same concept to health benefits.
What are the Benefits of a Defined Contribution Plan?
Employers now have every reason to consider moving to a defined contribution plan. They can embrace defined contribution plans knowing that everyone in their organization – including employees with pre-existing conditions – will have access to coverage.
There are several advantages to choosing a defined contribution plan. For one, the benefit is tax deductible for the business, and it is tax-free for employees when setup through a section 125 arrangement. Also, defined contribution plans allow employers to offer a wide range of benefit plan options at a much more predictable cost.
How is a Defined Contribution Plan Structured?
There are different ways to structure a defined contribution plan. Employers can set up a defined contribution health plan that acts as the business’s health benefit. This plan is not linked to a group health plan. The business provides employees a fixed monthly allowance so employees can purchase their own individual health insurance premiums. Employees have unlimited choices in policies – they can purchase any plan from any carrier or through state health insurance marketplaces.
As an alternative, employers can offer defined contribution within their group health plan. The business sets a contribution amount that employees can use toward health insurance premiums, along with offering a menu of health insurance options. Generally, employees can choose from two to ten policies.
Essentially, employers can decide if they want to offer group health insurance, and if so, they can provide defined contribution within that plan as a tool to help employees defray the cost of premiums. Or, employers can offer defined contribution as the health benefit, and then employees can choose any insurance policy.
Get out of the “One Size Fits All Health Plan” with a Defined Contribution Plan
Now with guaranteed-issue policies for employees with pre-existing conditions, there is no barrier preventing employers from choosing to allow employees to decide the premium and coverage level that is right for them.
Defined contribution plans are a win-win for businesses and their employees, providing cost savings, tax advantages and a wealth of options.
Let’s talk more about how a defined contribution plan can work in your business. We encourage you to call Charles J. Farro, co-founder and CEO of Marsh & McLennan Agency formerly Benefits Resource Group. You can reach him at (216) 393-1800 or firstname.lastname@example.org.