5 Reasons Employees Love Defined Contribution

Written by: Christina Merhar
Originally published on April 4, 2013. Last updated November 21, 2013.
HRA Employee Benefits, Value Defined Contribution

Recruiting and retaining key employees is important to every company, and your health benefit program is a key part of the compensation you offer to employees.

Due to the rising costs of traditional employer-sponsored group health insurance, defined contribution health plans are gaining popularity in the U.S.

With a "pure" defined contribution health plan, your company provides healthcare reimbursement plan (HRP) instead of a group health plan.  Then, you simply reimburse employees tax-free for their individual health insurance policies.

In addition to being a cost-effective and flexible solution for small businesses, we're providing our top 5 reasons why employees love defined contribution health plans.

1.  Employee Choice

With defined contribution, your employees choose how to spend their allowance. They select their own individual/family health insurance policy that best fits their needs. They choose from any carrier and any type of plan.  Often times, a company uses an insurance professional of their choice to help employees select these individual policies.

2. Plan Portability

Because your employees purchase their own individual or family health insurance policies, employees own the policy and can take it with them when they switch jobs.  

3. Guaranteed Renewability

Employees' individual health insurance policies are guaranteed renewable. This means they cannot be terminated by the insurance company unless they stop paying the premium. And, starting in 2014 all individual and family health insurance policies are guaranteed-issue.

4. Tax-Free Dollars

Employees value pre-tax dollars. Simply stated, $1 tax-free is worth more than $1 in taxable wages. By receiving reimbursements tax-free, the benefit is worth more than other taxable compensation.

5. Less Expensive Policies

The cost of individual and family health insurance premiums often costs 1/3 - 1/2 the price for similar group coverage in 45 states. This is primarily because insurance carriers in 45 states are allowed to, until 2014: (1) price based on age and (2) reject or charge more to applicants for personal policies with preexisting conditions.

Additionally, in 2014 most employees will have access to significant tax subsidies through the health insurance marketplace. If an employee is eligible for a tax credit, their cost of health insurance will be capped at 2% - 9.5% of their household income.  An employee is eligible if their household income is less than 400% above the federal poverty line (that’s $94,200 per year for a family of 4 in 2013).  

This will make the cost of individual health insurance premiums affordable (and guaranteed issued) for the majority of employees.


Post updated September 24, 2013. 

Originally published on April 4, 2013. Last updated November 21, 2013.


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