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Small Business Employee Benefits and HR Blog

Pure Defined Contribution: A Small Business Health Insurance Solution

September 30, 2013
HRP small business health insuarnce solution

Pure defined contribution health plans provide small businesses a way to offer employees excellent health benefits without the cost or complication of group health insurance. In this article we'll explore where we've been historically with small business health insurance options, and how pure defined contribution health plans provide a solution for small businesses in 2014 and beyond. 

The Past: Group Health Insurance Plans

In the past, businesses have always relied on group health insurance to offer employee health benefits. However, continual increases in health care costs have adversely impacted most businesses’ ability to provide health benefits.

Smaller employers and nonprofits have been particularly hurt, and many have dropped group health plans completely because they have become too expensive or they do not meet participation requirements. Mid-size businesses have coped with rising costs by shifting more of the cost to employees and their dependents.

For example, here's a look at the increasing cost of employer-sponsored health insurance from 1999-2013:

Source: KFF

Most businesses want to provide quality health benefits for their valued employees. But for a small business, a traditional group health plan may not be cost effective for the employees or the business. In fact, of small businesses not offering health insurance, the majority (61%) say cost is the primary reason. And, the annual increases in group health insurance are not sustainable for employers or employees.

The Solution: Pure Defined Contribution Health Plans

As a result, educated businesses are transitioning to pure defined contribution health plans.

Pure defined contribution health plans offer predictable costs to the business, while providing employees access to quality health insurance. This approach reduces the cost and time associated with traditional health insurance, while maintaining all of the benefits employees love.

How does it work? Rather than providing a specific group health plan, employers can fix their costs on a monthly basis by establishing a pure defined contribution health plan. The general concept is that a business would:

  • Not offer a group health insurance plan

  • Define any amount you can afford for health benefits

  • Use Defined Contribution Software (such as ZaneHealth) to give each employee a fixed dollar amount to use on individual health insurance premiums

A pure defined contribution health plan approach is an affordable alternative to a group health insurance plan. A defined contribution health plan is not a health insurance plan. Rather, it's a way to provide employees tax-free reimbursement of their individual health insurance plans.

Pure Defined Contribution & Employer Control

Pure defined contribution health plans give the business complete control over the cost the plan, allowing the business to meet their financial and health benefit goals. The business decides:

  • Amount of defined contribution allowances, with the flexibility to give different allowance amounts by class of employee (ex: $250/month for managers and $125/month for entry-level staff)

  • Who is covered (ex: employee and dependents, or just employee)

  • Employee eligibility criteria (ex: a waiting period for new hires, or eligibility based on hours worked)

defined contribution small business health insurance

Pure Defined Contribution & Employee Choice

In order for any health benefits program to work, it has to meet the business’s budget and provide value to employees. The following aspects of pure defined contribution health plans contribute to happier employees:

  • Access to the Best Health Care: Because employees choose their own individual health insurance policy they can pick the health coverage that best meets their needs, including the carrier, level of coverage, and the network of doctors. Employees say they no longer want a one-size fits all health insurance plan. They want the options to customize their health benefits. 

  • Coverage for All Employees: Starting October 1, 2013 all employees (regardless of health conditions) will be able to purchase an individual health insurance plan (effective January 1st, 2014) that is equal or better for them than existing group health insurance options.

  • Access to Health Insurance Subsidies: Starting in October 2013, employees can use their healthcare allowance to purchase policies from the new health insurance marketplaces. This gives them access to federal health insurance tax subsidies (starting in 2014) to lower the cost of their premium. 

  • Easy to Use: Employees value health benefits that are easy to understand, and easy to use. Similar to the transition from pensions to 401(k) retirement plans, the defined contribution approach requires employees to take more control of their health benefits. Defined contribution administration software provides employees easy access through an online portal where they can see benefit information and submit requests for reimbursement.

Questions about pure defined contribution health plans or small business health insurance solutions? Leave a comment below.

 

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