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Small Business Employee Benefits and HR Blog

Defined Contribution - A Health Insurance Solution for Startups

When starting and growing a business, health benefits administration and paperwork is the last thing a business owner wants to worry about. And yet, startups know that offering health benefits will help recruit top talent.

The bottom line is that the cost and time required to manage traditional health benefits is a major barrier for startups.  Since 2009, small business costs have nearly doubled and many startups see health benefits as out of reach. startup_health_insurance_solution

Which is why most startups are using pure defined contribution health benefits.

Defined contribution removes the barrier to health benefits, and solves a lot of the headaches associated with traditional health benefits. 

This article takes a look at why startups are quickly adopting defined contribution as a health insurance solution.

Overview of Defined Contribution

defined contribution health plan allows a startup 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 individual health insurance.

With this approach, the startup is essentially offering employees a health insurance allowance as the benefits package. 

Why Defined Contribution is Popular with Startups

Defined contribution is becoming popular with startups because the solution is affordable, 100% paperless, and flexible to the needs of a growing company. Here's a look at the benefits of defined contribution and why they fit well with startups.

  1. Controllable Costs – The startup sets all costs because they decide how much to contribute - whether that be $50/month or $1,000. There are no minimum contribution requirements, and the startup can vary employee contributions based on job criteria.

  2. More Time for Growing the Business – Offering defined contribution takes less than 5 minute per month, done all online. Administering the benefit simply becomes a payroll function and requires minimal involvement from team members. There are no annual renewals, and employees maintain the direct relationship with the insurance company. Many startups are adopting lean operational philosophies and defined contribution aligns with lean goals. 

For startup employees, defined contribution works well because of:

  1. Lower Costs – In today's workforce it's not just the employer who pays part of the premium cost -- it's employees too (especially for family coverage). Individual health plans costs 20-30% less than traditional group plans and new tax credits are available to qualifying employees to lower their out-of-pocket costs even more.

  2. Choice of Plan – With their defined contribution allowance, each employee may choose the health plan that best fits their needs. This can be a plan from any insurance carrier and any type of plan coverage (deductibles, network, etc.). Employees can keep their doctor and preferred medical providers.

  3. New Advantages of Individual Health Insurance - Health reform has created new advantages to individual health insurance. Most notably, pre-existing conditions no longer matter.

4 Simple Steps To Start Offering Defined Contribution Health Benefits

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

  • Step 2 - Define any amount the practice 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

See related articles on startup health insurance solutions: