Defined Contribution Health Plans: A Great Deal For Small Businesses

It’s hard to break with tradition. That’s not always a bad thing. Thanksgiving wouldn’t seem like Thanksgiving without a turkey …

It’s hard to break with tradition.

That’s not always a bad thing. Thanksgiving wouldn’t seem like Thanksgiving without a turkey dinner and football. Families have always looked forward to graduation ceremonies as a memorable way to mark an important achievement.

Small businesses often stick with another tradition: offering group health insurance as an employee benefit.

That one, though, doesn’t always make sense. More and more employers are switching from group plans to defined contribution health plans.

What Are Defined Contribution Plans?

In a nutshell, defined contribution plans replace traditional company group health coverage with lump-sum payments to employees to be used for health insurance costs.

Some employers simply increase their workers’ taxable income, to give them enough money to shop for a health plan on a federal or state health exchange (or if the employees are smart, on a private exchange).

The majority of small businesses, though, work directly with a private health insurance marketplace and make benefit payments directly to the marketplace.

That’s a big benefit for employees, because private health insurance marketplaces like Candor Insurance (one of the nation’s largest and most advanced marketplaces) offer an enormous selection of plans from all major insurance carriers. By contrast, carriers usually don’t let small businesses offer their complete menu of health plans available to private marketplaces.

This setup gives employees a much greater choice of insurance options. They’re able to pick the health plan that works best for their needs, their family situation and their budget – and not stuck choosing from the small selection of plans offered through their employer.

Workers aren’t the only ones who benefit from defined contribution plans, though. Employers do, too.

Why Employers Should Offer Defined Contribution Health Plans

Switching to a defined contribution health plan makes life a lot easier for small business owners and human resources departments, while saving the company money and creating a more satisfied workforce. Here’s how that all works.

  • Ease of administration: The business no longer has to answer employees’ questions about benefits or handle problems with their claims. Once a company sets up a contract with a private health markatplaces, it simply has to make the payments.
    If the benefits are being paid directly to employees, adjustments just have to be made in the company’s existing payroll software. The workers are the ones responsible for selecting and purchasing their insurance, and dealing with the carrier.
  • Tax benefits: The IRS considers an employer’s defined benefit contributions to be tax deductible.
  • Predictable costs: Defining the amount the company will contribute to employees’ health care in advance makes the budget line item simple and predictable. When health insurance premiums go up, as they almost always do every year, the business can decide whether to increase its contributions or pass the price hike on to employees.
    The bottom line: companies with defined benefit plans don’t face the annual, automatic premium increases that come with offering group health insurance.
  • Flexibility in employee categories: The business can choose to offer different health care reimbursements for different classes of workers, like hourly employees or salaried employees.
  • Happier employees: A defined contribution health plan gives workers more choice, lets them opt for lower-cost policies, and allows them to put their health care “savings” into HSA accounts. They’re also able to see exactly how much the employer is paying to subsidize their health care.