While some individuals who purchase coverage through the government marketplace may be able to lower their health care insurance premiums by qualifying for federal subsidies, the same does not hold true when a business provides a traditional group health insurance plan for their employees.
Keeping costs down can be problematic, particularly for small and medium-sized businesses. Employers need to provide health insurance benefits to attract and retain employees, but they also need to control their costs. Many small and medium-sized businesses are now turning to a defined contribution model instead of traditional group health insurance plans.
How does defined contribution work?
In the defined-contribution model, an employer allocates a set amount of money (defined contribution) to each employee, and the employee can then use that money to select the health insurance plan that best fits their needs. The number of businesses that continue to offer traditional group health care coverage is declining as employers begin to realize the benefits of defined contribution.
Benefit #1 – More Insurance Choices
Employees are kept happy because they can get the same, or better, coverage by being able to shop among a number of different insurers and choose a plan with the features that are most relevant to their needs. Employers get to decide how much of an allowance they want to give to their employees.
Benefit #2 – Reduced Administrative Burden and Costs
A defined contribution strategy can be combined with exchange technology that offers each employee an account where they can access coverage information, search networks, and request changes without bothering the employer’s administrator. Administrative costs are reduced to a minimum and payments to employees for eligible premium expenses becomes a simple task for the payroll department.
Benefit #3 – You Get to Stay Out of the Health Insurance Business
Instead of needing an insurance expert in your HR department to answer employee questions and address their problems with their health insurance, that responsibility is turned over to the insurance companies that issue the policies. Most companies bring in a licensed insurance agent to assist employees in the enrollment process.
Benefit #4 – No Minimum or Maximum Contributions
Employers choose the amount of money they want or can afford to spend on healthcare coverage for their employees. Unlike a traditional group health plan, if insurance premiums increase (and they do), your company is under no obligation to increase the amount of the defined contribution. You are in control and can choose to raise or lower the defined contribution amount each year.
Benefit #5 – Flexible Plan Design
There are no minimum participation requirements, meaning that an employer does not need to worry about how many employees choose to participate. In addition, the employer is free to offer different allowances to different employee classes. Employers cannot discriminate (based on non-rating factors), but they can offer key employees higher allowances as part of their compensation package.
Under the Affordable Care Act, most employers are now required to provide health insurance for their employees or face serious penalties and fines. If you would like to find out more about defined contribution and how it can be a more affordable option for your firm, schedule an appointment with a licensed benefits counselor to help with the matter.
