Defined Contribution - A Health Insurance Solution for Small Technology Companies

Written by: Christina Merhar
Originally published on December 31, 2013. Last updated July 8, 2022.

As small business health insurance costs continue to rise, companies 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 technology companies and tech startups.

This article reviews why small technology companies are quickly adopting defined contribution healthcare as a health insurance solution for 2014 and beyond.

Overview of small business health insurance

Small business health insurance plans are a form of employer-sponsored health coverage. With a traditional small business 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 companies can’t offer traditional small business health insurance coverage due to rising costs and restrictive minimum contribution and participation requirements. Which is why many small technology companies are transitioning (or starting to 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 companies to contribute to employees' healthcare insurance expenses in a compliant and tech-savvy way.

Overview of Defined Contribution Healthcare

Defined contribution healthcare allows any company to name its price for health benefits. Rather than paying the costs to provide a specific small group health insurance plan (a "defined benefit"), the company instead fixes 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 defined contribution plan allows.

Why Defined Contribution is Popular with Small Tech Companies

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 company to set and control all health benefits costs. This feature alone allows many small companies and startups to offer formal health benefits for the first time.

Additionally, there are other benefits of defined contribution that fit well with small tech companies such as employee classes, more time for growing the company, and a technology-based solution. Here's a look at those benefits and why they fit well with small tech companies.

  1. Controllable Costs – With defined contribution healthcare, the company fixes their costs because they decide how much to contribute. The company is not tied to minimum contribution requirements, which can rise unpredictably year to year. Since there is no minimum amount to contribute, if the company wants to contribute any amount to employees' healthcare, they can afford defined contribution. 

  2. Employee Classes - The defined contribution allowances can vary by employee class. In other words, the company can provide a different contribution amount by job criteria or family status. This is attractive to small tech companies who are often in a competitive hiring market for software developers, programmers, and IT staff. With defined contribution employee classes, a company could offer $300/month to programmers and $150/month to sales reps.

  3. More Time Growing the Company – Defined contribution healthcare allows a small company to provide a health benefits program in less than 5 minutes per month. Administering the health benefits program becomes a payroll function and requires minimal involvement from the company. There are no annual renewals, and employees maintain the direct relationship with the insurance company. Many small tech companies are operationally lean, focused on optimizing business results with limited resources. Defined contribution aligns with these lean goals. 

  4. Technology-Based Solution - Small technology companies have been early adopters of defined contribution because most companies use defined contribution software to administer the benefits (ex: a SAAS platform such as PeopleKeep). Employees are comfortable logging in to an online portal to submit their requests for reimbursement, and appreciate the paperless nature of defined contribution software. 

4 Simple Steps To Start Offering Defined Contribution Healthcare

Small tech companies 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 date to terminate your group health plan (if you have one)

  • Step 2 - Define any amount the company can afford

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

  • Step 4 - Utilize online defined contribution administration software to reimburse employees

Originally published on December 31, 2013. Last updated July 8, 2022.


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