Why Use Defined Contribution Software?

Written by: Christina Merhar
Originally published on April 25, 2013. Last updated August 16, 2018.

Defined contribution health plans are gaining popularity with small and medium-sized businesses as a new alternative to employer-sponsored group health insurance plans.

Rather than paying the costs to provide a specific group health plan benefit (a "defined benefit"), employers can fix their costs on a monthly basis by establishing a defined contribution health planDefined contribution health plans by themselves are not health insurance plans. With defined contribution health plans, both the employees and employers save on the cost of health insurance.

defined contribution health plan is set up using a Healthcare Reimbursement Arrangement (HRA).

Why Use Defined Contribution Software?

There are two main reasons why businesses should use Defined Contribution Software to administer their defined contribution plan: 1) Time savings/ease of use, and 2) Tax-savings/compliance.

1. Time Savings & Ease of Use

Good Defined Contribution Software (or HRA software) removes the time, cost and complication 
of offering health benefits. Employers that use Defined Contribution Software can expect to:

  • Administer a defined contribution health plan online in less than 5 minutes per month.

  • Integrate a defined contribution health plan with existing payroll or HR processes.

  • Manage the defined contribution health plan online 24/7.

2. Tax Savings & Compliance

Defined Contribution Software keeps the business in compliance with three key areas:

a) Tax Savings & IRS Compliance: The IRS requires that a formal defined contribution health plan (with IRS-compliant plan documents) be established in order for reimbursements to be tax-free for the employer, and employees. 

b) Federal Compliance: The federal government has guidelines for employers who want to contribute to employee's IRS-qualified health insurance premiums under HIPAA and ERISA:

  • HIPAA (Medical Privacy): By using Defined Contribution Software, your software provider processes employees’ claims, keeping all medical information is HIPAA-protected. And, all receipts are stored in compliance with HIPAA for 10 years, as required by the IRS for audit purposes. The employer never sees employees’ medical information.

  • ERISA: Under ERISA, the employer is not allowed to “endorse” a specific individual health insurance plan. Defined Contribution Software keeps the employer ERISA-compliant because you never know what policies are purchased.

HIPAA defined contribution software

c) ACA/Health Care Reform: The Affordable Care Act (ACA) introduced new requirements for Defined Contribution health plans including how benefit information is presented to employees (Summary of Benefits & Coverage, or SBC), new reporting forms (720/5500), and new plan design requirements (ex: prohibition on annual limits). A good Defined Contribution Software provider makes sure you have the appropriate documents, data and plan settings in place to be ACA compliant.

Here's a summary chart of defined contribution compliance considerations:


FAQ: Can I Administer the Defined Contribution Health Plan Myself?

Technically, a company can self-administer its own defined contribution health plan or HRA, but failure to comply with the minimum federal administration requirements is common (and costly) without utilizing proper Defined Contribution Software. If an employer does utilize proper Defined Contribution Software to fully comply with the HRA, ERISA, HIPAA, COBRA and ACA regulations, the administrative cost likely outweighs the benefits.

FAQ: Can I Pay For Employees’ Insurance Premiums Without an Formal Defined Contribution Plan?

Some businesses might want to pay directly for an employee's individual health insurance plan without utilizing an ERISA and HIPAA-compliant platform, but doing so may put the business out of compliance with federal regulations and may increase the company’s (and employee's) tax liability.

The Comprehensive Guide to the Small Business HRA

Photo Credit: Hubspot

Article updated September 23, 2013.

Originally published on April 25, 2013. Last updated August 16, 2018.


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