Small businesses and nonprofits are looking for alternatives to traditional health benefits. One of the most popular health insurance alternatives owners are investing in is defined contribution health benefits.
Defined contribution is considered an alternative health benefits strategy because the business offers stipends for health insurance, rather than a specific health insurance plan. With "pure" defined contribution health benefits, employees purchase any individual or family health insurance plan.
Some economics go as far to say that defined contribution is the future of health benefits. Is a defined contribution strategy the right approach for your business?
Here are ten signs your business or nonprofit should invest in defined contribution.
Sign #1: You Can't Afford (or Don't Want to Pay the Price Tag of) a Small Group Plan
If you want to contribute to employees' health insurance expenses, but cannot afford a small group health insurance plan, then defined contribution could be the right investment.
That's because with defined contribution your business names the price. When you set up a defined contribution health plan, you determine the amount to contribute to employees' health insurance stipends and there are no minimum contribution amounts.
Sign #2: You Need to Customize Health Benefits to Recruit and Retain Key Employees
If you need to strategically offer different health benefits to different types of employees, then defined contribution is a smart investment. For example, if Senior Programmers are especially hard to recruit and retain in your competitive labor market, design your health benefits with a higher stipend for this class of employees.
Sign #3: You Need Predictable Health Benefits Costs Month to Month and Year to Year
If you need predictable health benefits costs short term and long term then you should invest in defined contribution. As mentioned in #1, defined contribution allows your business to name the price. The stipend amounts can be adjusted to fit (or grow with) your budget. And, there are no annual renewal increases or fees as is common with traditional health insurance.
Sign #4: You Have Limited Time and/or Personnel to Administer Health Benefits
Defined contribution health benefits is a smart investment for businesses with limited time and personnel to administer health benefits. This is especially common at small and growing businesses and nonprofits. Administering health benefits often falls on the business owner or office manager - time taken away from making the organization successful.
Defined contribution health benefits are administered online (i.e.: no paperwork). Once set up online, administration takes 5 minutes per month.
Sign #5: You Want to Get Out of the Health Insurance Business
Many business owners value offering health benefits, but find that researching and dealing with the health insurance is an administrative drain. Defined contribution allows businesses to get out of the health insurance business and still offer employees a valuable health benefit.
With defined contribution health benefits, your small business sets up the defined contribution plan, and allows employees to purchase their own insurance - just like car insurance. Employees can be reimbursed for their insurance from their stipend.
A defined contribution strategy eliminates the business to insurance company relationship, and it allows employees to select the health insurance that best fits their unique health and financial situation.
Sign #6: You Want to Give Employees and their Family Members Access to the Health Insurance Tax Credits
Defined contribution is a smart investment for businesses who want to give employees and their family members access to the health insurance tax credits (the health insurance discounts available to approximately 68% of Americans through the health insurance exchanges).
Let's expand on this idea.
Under health reform, a defined contribution stipend does not count as qualified health insurance, and so having a defined contribution stipend does not disqualify employees from the health insurance tax credits. Employees can be reimbursed by their stipend for the non-subsidized portion of their health insurance premium.
With a traditional group health insurance plan, just offering health coverage (considered "affordable" and "qualified") disqualifies employees -- and often their family members -- from the health insurance tax credits... even if employees don't enroll in the offered coverage.
Sign #7: You Want to See a High Return on Investment (ROI) on Health Benefits
More and more, small business owners are looking to quantify their spending in all areas, including health benefits and personnel. If this describes you, then defined contribution is a smart investment because you will see more value - and therefore higher ROI - on health benefits.
That's because individual health insurance premiums, on average, costs less than group health insurance premiums. A $200/month contribution to a defined contribution health plan will go farther than $200/month to group health insurance premiums.
Sign #8: You've Seen Your Small Business Health Insurance Costs Increase, and Coverage Levels Decrease
If you've seen your small business health insurance costs increase, and as a result had to decrease coverage levels, pass more costs on to employees, or drop health insurance all together, then defined contribution is a smart investment.
As discussed previously, that's because the costs are controllable and predictable. Many businesses who switch from traditional group health insurance to defined contribution health benefits see their overall cost go down, and employees' coverage level go up.
Sign #9: You're Open to Using Innovative and Cutting Edge Solutions to Achieve the Same or Better Results
If you're open to using innovative and cutting edge solutions to gain a competitive edge, then you should invest in defined contribution. Defined contribution health benefits is not a new strategy, but it is really taking off now due to health reform's advantages to individual health insurance (guaranteed-issue and health insurance tax credits).
Defined contribution is a big buzzword in the health insurance industry because it is a straight forward approach to health benefits that achieves results. At the same time it can be a controversial approach because it is a major shift in how employers offer health benefits.
Businesses who see the benefits and take advantage of a defined contribution approach are on the forefront of this new health benefits trend that is soon to become mainstream for small and mid-size employers across the U.S..
Sign #10: Your Employees Have Diverse Medical Needs
Lastly, you should invest in defined contribution health benefits if your employees have a diverse medical and coverage needs. With traditional group health insurance, it's most common for small businesses to offer one health plan. Businesses with diverse health needs have a hard time meeting the needs of employees with a one-size-fits-all plan.
With defined contribution health benefits, employees can work with a health insurance broker to purchase any health plan from any carrier, with access to their preferred doctors.
What other signs are there that you or a client should invest in defined contribution health benefits? Leave a comment on question below.
Photo credit: HowardLake