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What is a Pure Defined Contribution Health Plan?

Defined Contribution Health Plans • May 20, 2013 at 7:00 AM • Written by: Christina Merhar

Pure defined contribution health plans are fast becoming popular with small businesses as an alternative to group health insurance. With a pure defined contribution plan a business contributes a fixed dollar amount (a "defined contribution") toward employees' health insurance expenses. 

The shift from employer-sponsored plans (a "defined benefit") to defined contribution health plans is similar to the shift in retirement savings from pensions (a defined benefit) to 401Ks (a defined contribution). After realizing the savings associated with moving away from defined benefit retirement plans, many businesses are also applying this model to their healthcare benefit programs.

However, the term "defined contribution health plan" has become a buzzword in the industry, and doesn't always mean the same type of healthcare benefit. This article provides a definition of a pure defined contribution health plan.

There's a defined contribution health plan for your needs. See how three types of health reimbursement arrangements (HRAs) compare with our chart.

Pure Defined Contribution Health Plan

With a pure defined contribution health plan, the business offers health benefits in the form of a health insurance allowance instead of a group health insurance plan. The business simply sets up a Defined Contribution Health Plan to reimburse employees tax-free for their personal insurance policies.

Pure defined contribution health plans allow the business to get out of the insurance business. A pure defined contribution plan is not linked to a group health insurance plan. Rather, the defined contribution health plan is the business's health benefit.

To summarize, with a pure defined contribution health plan:

  • The business provides employees a fixed monthly allowance for individual health insurance premiums. No group health plan is offered.

  • Employees purchase their own individual health insurance premiums (often with the help of a broker or agent). Employees have unlimited choices in policies, and can purchase any type of plan from any carrier. Starting in 2014, employees can purchase policies through the new state health insurance marketplaces. Also, in 2014 all personal policies will be guaranteed-issue and massive individual premium tax credits will be available for plans purchased through the marketplaces.

  • Using Defined Contribution software, employees submit their expenses, and the business reimburses them tax-free on payroll, up to the amount of their healthcare allowance.

When set up correctly, defined contribution health plans provide the same tax benefits as a group health plan. However, one hurdle preventing some businesses to switch to a defined contribution health plan was key employees with a pre-existing condition. In 2014 this hurdle goes away. With guaranteed-issue policies starting in 2014 and massive tax subsides through the health insurance marketplaces, defined contribution health plans now have all the same benefits of a defined benefit (group health insurance plan), often at a much lower cost for the business and employees.

defined contribution health plans

Other Variations of Defined Contribution Health Plans

So, how else is the term "defined contribution health plan" being used? One popular variation is a type of defined contribution within group health insurance offerings.

In this arrangement, the business sets an amount to contribute to employees' health insurance premiums, but provides a limited menu of health insurance options (for example, employees choose from 2-5 insurance policies). This type of "employee choice" group health insurance offering is common with larger businesses. It is also one of the features that some state small business SHOP Marketplaces will offer to small businesses as part of health care reform in 2014 (and that all state SHOP Marketplaces will be required to offer by 2015). 


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Christina Merhar