We're nearing 2014 and most small business owners are still cautious about the economic outlook. In a recent survey of small business owners a third (31%) said they were optimistic about the economic outlook for 2014, up from 26% last year. However, small business owners are still cautious about spending. Nearly two-thirds (62%) said they have surplus capital but they aren't spending it at this point.
On top of this, health care costs are at an all-time high. The cost to cover a single employee in 2013 was $5,884/year and $16,351/year for family coverage. Small businesses want to offer health benefits to recruit and retain key employees, but the cost of traditional health insurance is unsustainable to small businesses and to employees.
So, what can business owners do?
A Secret Weapon for Health Care Costs
A "pure" defined contribution health plan is a secret weapon your business can use right now to:
Start offering health benefits for the first time, or
Save on health care costs.
With a "pure" defined contribution health plan, you can give employees a monthly health insurance stipend to spend on their own personal health insurance policy. On the individual market, health plans are much less expensive than group coverage. And in 2014 eligible employees can access health insurance tax credits.
Structuring a "Pure" Defined Contribution Health Plan
A "pure" defined contribution plan is a health benefits strategy. It is an arrangement where you reimburse employees’ individual health insurance premiums - instead of offering a traditional group health insurance policy. With this type of approach, your business:
Sets any amount to contribute to employees' health insurance,
Gives employees tax-free health care allowances using defined contribution software, and
Reimburses employees on payroll for approved premium expenses.
Most businesses utilize a limited-purpose Section 105 medical reimbursement plan as the foundation for their "pure" defined contribution plan. The Section 105 plan is the vehicle to provide the health insurance stipends. By using a Section 105 plan, you stay compliant with ACA, IRS, ERISA, and HIPAA regulations. In fact, a Section 105 plan is one of the only compliant ways a business can reimburse employees for personal health insurance premiums. To ensure compliance and easy administration, businesses use a defined contribution software provider to set up and administer the Section 105 plan.
Why Defined Contribution is Your Secret Weapon for Controlling Health Care Costs
Being able to set, control, and predict all health care costs is revolutionary for many small business. After all, the number one reason small businesses don't offer health insurance (but want to) is cost. With a defined contribution approach your financial liability is controllable, and employees shop for policies that best meet their individual health needs. Here's how a defined contribution approach accomplishes cost controls.
First, if you want to contribution any amount to employees' health care costs you can afford a defined contribution health plan. That's because your business sets how much to provide to employees, and there are no annual renewal increases or minimum contribution amounts. Because of this, the business literally controls all health care cost liability.
Second, all contributions are notional until your business reimburses employees. Employees purchase individual health insurance policies and submit their premium expense for reimbursement. Your business reimburses employees directly on payroll. Pre-funding of third party bank accounts is not required, and your business only reimburses employees for eligible premiums, up to the amount of their stipend.
Lastly, if an employee leaves your business, any unused allowance amounts stay with your business.
Business owners are using this secret weapon to control health care costs in an innovative and effective way. What are your tips for using defined contribution to control costs? Leave a comment below.