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Small Business Employee Benefits and HR Blog

5 Tips on Introducing Defined Contribution to Employees

March 24, 2014
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Your company has researched health insurance options, set a health insurance budget, selected a "pure" defined contribution health plan, and completed setup with your defined contribution software provider. Now, how do you introduce the idea to employees? Here are five quick tips on introducing defined contribution to employees.

introduce defined contributionNote: In this article we are discussing a "pure" defined contribution health plan where employees are offered a healthcare allowance for qualified health insurance premiums. With a "pure" defined health plan there is no group health insurance plan offered.

#1: Defined Contribution is Like a Stipend for Health Insurance

Instead of offering a specific health insurance plan (which may not fit all employees' needs), the company is offering employees a set monthly amount to use on health insurance premiums. 

Defined contribution is like a health insurance stipend, a health insurance allowance, or a business expense account for health insurance.

#2: Defined Contribution Saves the Company, and Employees, Money

Most companies choose to offer a defined contribution health plan because it saves the company, and employees, on the cost of health insurance.

The cost of purchasing an individual health plan costs less (on average) than traditional job-based health insurance. And, eligible employees (and their families) have access to federal health insurance tax credits and subsidies. Unlike traditional job-based health insurance (group health insurance), the defined contribution health plan does not disqualify employees from the discounts.

#3: How Defined Contribution is Similar to Job-Provided Health Insurance

A defined contribution health plan is not health insurance. But there are some similarities which help employees understand the health benefit:

  • The company is contributing to employees' health care

  • The company has set up a formal health benefits plan 

  • Employees are provided health benefits based on eligibility (ex: full time vs. part time)

#4: How Defined Contribution is Different than Job-Provided Health Insurance

Explaining the differences also helps employees understand defined contribution.

Defined contribution is different than job-provided health insurance in the following ways:

  • With defined contribution, employees purchase their own health plan with their own money. Employees can be reimbursed for what they pay out-of-pocket, up to the amount in their balance. With job-provided health insurance, the company purchases the plan. Employees usually reimburse the company for a portion of the premium via payroll.

  • With defined contribution, employees can take their health plan with them if they leave the company. Employees own their plan. With job-provided health insurance, the employee generally loses their health insurance when they quit or retire.

  • With defined contribution, employees choose the coverage and doctors that best fits their needs. With job-provided health insurance, the company chooses the plan.

#5: How Defined Contribution Works 

It's important to explain to employees how defined contribution works - the nuts and bolts about how they receive their allowance, how they are reimbursed, and how to enroll in health insurance. With defined contribution, employees will:

  1. Choose an individual health plan. Each employee selects and purchases a health plan. Many employers have a health insurance broker available to help employees understand plan options and enroll in a plan.

  2. Submit a reimbursement request. Employees log in to their online participant account to request reimbursement, or submit a paper form via fax or mail.

  3. Receive reimbursement. The defined contribution provider approves all reimbursement requests. Then, the company is notified to reimburse employees for their expenses, up to the amount available in their balance. The company reimburses employees directly via payroll, check, or direct deposit.

For a more detailed overview see: How to Explain Defined Contribution Healthcare to Employees.

What are your questions (or tips) about introducing defined contribution to employees? Leave a comment below.

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