How Pure Defined Contribution Works - A Simple Overview

Written by: Christina Merhar
Originally published on April 18, 2014. Last updated April 26, 2022.

Defined contribution health plans are becoming more and more popular. A recent study found that 47% of employers are moving to defined contribution, with another quarter of employers considering it.

As your company or client considers this approach, the most common question is "how does it work?". Here is a simple overview - the nuts and bolts - about how "pure" defined contribution health plans work.How_DCP_Work

Tip: In this overview, we are talking about "pure" defined contribution. With this type of defined contribution health model, the employer provides health insurance allowances that employees can use on any qualified individual or family health plan. 

How Pure Defined Contribution Works

The Employer...

  • Determines contributions
  • Sets eligibility
  • Picks start date
  • Enrolls employees
  • Sends welcome kits

The Employees...

  • Purchase individual policies with their own money (just like car insurance)
  • Submit "expenses" for reimbursement

The Defined Contribution Software Provider...

  • Adjudicates employees "expenses" (for compliance with HIPAA and other federal regulations)

The Employer...

  • Reimburses employees for "expenses" (like business expenses reimbursement)

The Health Insurance Broker... 

  • Helps employees select and purchase individual policies (ie: sells the health insurance)

Originally published on April 18, 2014. Last updated April 26, 2022.


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