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Small Business Employee Benefits and HR Blog

Defined Contribution - A Health Insurance Solution for Small Law Firms

December 27, 2013

As small firm health insurance costs continue to rise, employers are looking for ways to offer health insurance coverage at a sustainable cost. One of these new strategies is defined contribution healthcare. And, one of the industries early to adopt defined contribution healthcare has been small law firms, legal offices, and legal clinics. This article reviews why small law firms are quickly adopting defined contribution healthcare as a health insurance solution.Health Insurance Solutions for Law Firms

Overview of Small Firm Health Insurance

Small firm health insurance plans are a form of employer-sponsored health coverage. With a traditional small group health insurance plan, costs are typically shared between the employer and the employee, and coverage may also be extended to dependents. In certain states, self-employed persons without other employees may qualify for group health insurance plans. There are several different types of small business health insurance plans available. However, many small firms can’t offer traditional small firm health insurance coverage due to rising costs and restrictive minimum contribution and participation requirements. Which is why many small firms are transitioning (or starting offer health benefits for the first time) with a defined contribution strategy. This type of strategy is not health insurance, but rather a way for smaller firms to contribute to employees' healthcare insurance expenses in a compliant way.

Overview of Defined Contribution Healthcare

Defined contribution healthcare allows any firm to name its price for health benefits. Rather than paying the costs to provide a specific small business health plan (a "defined benefit"), employers instead fix their costs by establishing a monthly dollar amount (a “defined contribution”) that employees may spend on qualified health insurance.With the purest form of defined contribution, employers offer employees a health insurance allowance as the benefits package. Employees purchase an individual policy of their choice, often with the help of a health insurance broker, and are reimbursed as the plan allows.

Why Defined Contribution is Popular with Small Law Firms

When you hear people talk about defined contribution healthcare, the most prominent feature discussed is the cost savings and fiscal control. Defined contribution allows the firm to set and control all health benefits costs. This feature alone allows many small firms to offer formal health benefits for the first time. Additionally, there are other benefits of defined contribution that fit well with small law firms, such as compliance, employee classes, and employee choice. Here's a look at those benefits and why they fit well with small legal firms.

  1. Controllable Costs – The law firm fixes their costs because they decide how much to contribute. The firm is not tied to minimum contribution requirements, which can rise unpredictably year to year.

  2. Employee Classes - The defined contribution allowance can vary by employee class. In other words, the firm can provide a different contribution amount by job criteria or family status. This is attractive to small law firms who may want to provide a different allowance amount to partners than to their paralegal staff.

  3. More Time with Clients – Defined contribution healthcare allows a small law firm to provide a health benefits program in less than 5 minute per month. Administering the health benefits program becomes a payroll function and requires minimal involvement from the firm. There are no annual renewals, and employees maintain the direct relationship with the insurance company. Many small law firms are operationally lean, focused on spending the most time with clients. Defined contribution aligns with these lean goals. 

  4. Compliance - Small law firms have been quick to adopt defined contribution healthcare because they understand the compliance reasons for using a formal defined contribution plan (such as a Section 105 plan) and the importance of complying with ACA, ERISA, HIPAA, and IRS.

4 Simple Steps To Start Offering Defined Contribution Healthcare

Small law firms looking to set up health benefits with defined contribution generally work with a health insurance broker, and follow these four simple steps:

  • Step 1 - Set a dated to terminate your group health plan (if you have one)

  • Step 2 - Define any amount the office can afford

  • Step 3 - Select an Insurance Professional of your choice to help each employee find the right individual policy

  • Step 4 - Utilize online administration software to reimburse employees

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