Since WWII, group health insurance policies enjoyed enormous tax advantages over individual plans because:
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Employers were allowed to pay for group health insurance pre-taxed, “off the books”
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Employees were allowed to pay (via salary reduction) for group health insurance, also pre-taxed, “off the books”
But, the rising cost of health care has caused employers of all sizes to re-evaluate how much they pay for insuring their employees. Defined contribution plans provide a solution to the cost concerns of traditional group health insurance because companies define and control all the costs with a defined contribution plan. Lastly, the availability of Section 105 medical reimbursement plans in 2002 allowed defined contribution health plans the same tax benefits to employers and employees.
For more history on defined contribution plans, see this guide.
#3) What are the other benefits of defined contribution plans, besides cost predictability?
Cost is a key factor in offering employees health benefits, but cost is not always the only consideration for companies. Companies also switch to defined contribution plans because:
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Contributions can be tax-free (when the defined contribution plan is set up using a compliant Section 105 Healthcare Reimbursement Plan).
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Defined contribution plans allow for employer flexibility of plan design.
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Defined contribution plans are easy for HR to administer.
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Defined contribution plans allow the company to get out of the health insurance business.
#4) What do employees think about defined contribution plans?
While defined contribution plans are a change in the way companies offer access to health insurance, and in