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Small Business Employee Benefits and HR Blog

Defined Contribution Health Plans - The 3 Plan Design Questions

October 2, 2013
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ThreeQuestionsDCPlanDesignA growing number of businesses and nonprofits are transitioning to Defined Contribution Health Plans. What are the steps to designing the perfect health benefits?

There are three key questions to ask when designing your Defined Contribution Health Plan. These three questions will help you customize a plan that achieves your employee health benefit goals (and meets your budget).

A Quick Overview of Defined Contribution Health Plans

A Pure Defined Contribution Health Plan is a straight-forward approach to employee health benefits. Rather than paying the costs to provide a specific group health plan, you can fix your costs on a monthly basis by establishing a Pure Defined Contribution Health Plan. The general concept of a Pure Defined Contribution Health Plan is that your organization would:

  • Step 1: Not offer a group health insurance plan.

  • Step 2: Define any amount you can afford for health benefits and use Defined Contribution Software to give each employee a fixed allowance amount to use for individual health insurance. 

  • Step 3: Select an Insurance Professional, and/or provide information about the new Health Insurance Marketplaces to help employees shop for and purchase individual health policies (typically, this saves the employee 20-30%).

  • Step 4: Use Defined Contribution Software to reimburse employees via payroll.

Why "Pure"? We refer to this approach as a "Pure" Defined Contribution Health Plan because it is not integrated with group health insurance offerings.

The 3 Questions to Ask When Designing Your Defined Contribution Health Plan

1. When will the plan year start?

Your organization will decide when your Defined Contribution Health Plan will start, and when the plan year will run. For example, you may decide to start the plan on June 1, but going forward have a plan year of January 1 to December 31. 

2. What monthly allowance amounts will you provide?

You probably already have a budget in mind for health benefits. Within this budget, how will you divide up employees' monthly allowances? You can provide the same monthly allowance amount to all employees, or you can provide different monthly allowances to different types of employees. This is also called employee classes. Classes must be based on bone-fide job criteria such as job title, location, etc. You can also vary the allowance amounts by family status (single, married, etc.) within an employee class.

For example, you could provide $300/month to Senior Programmers and $150/month to Administrative staff.

Following this example, you could add a layer of family status allowances. For the Senior Programmers you could provide $300/month to single participants, $350/month to married participants, and $400/month to married with children participants.

3. When are employees eligible for the plan?

What criteria makes employees eligible to participate in the Defined Contribution Health Plan? For example, do they need to work a certain amount of hours, or been employed for a certain number of days? (Note: the maximum waiting period is 90 days). This criteria will set employee eligibility for the Defined Contribution Health Plan.

Related Defined Contribution Health Plan articles and resources:

  Defined Contribution Plan Design Worksheets \u002D Free Guide

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