Managing Small Business Health Insurance Costs with Defined Contribution

Written by: Christina Merhar
Originally published on April 1, 2014. Last updated January 18, 2017.

When you own a small business, you juggle a lot of of responsibilities, and a lot of demands on your checkbook. Managing health insurance costs can feel like one of these juggling acts.managing small business health insurance costs

How can small business owners offer employees quality health coverage while managing the costs of health insurance? One health insurance approach that gives small business owners complete cost control and predictability is a "pure" defined contribution health benefit.

Why Managing Small Business Health Insurance Costs is So Important

One of the biggest concerns of health insurance is the cost - both the cost of entry when starting to offer health insurance, and the costs increases many businesses face at annual renewal time.

Creating cost and liability controls is vital to any business's predictability and scalability. And yet, being able to set, control, and predict all health benefits costs is revolutionary for many businesses because traditional health insurance does not offer these controls. A health insurance solution with cost and liability controls allows small businesses to:

  • Accurately budget for the health benefits cost monthly, annually, and in the long-term.

  • Confidently tell employees the business will be able to afford health benefits in the long-term.

  • Know exactly, at any time, what the business's liability and risk is.

How Defined Contribution Empowers Small Businesses to Manage Costs

With "pure" defined contribution health benefits, the business offers employees health insurance allowances ("defined contributions") to use on individual health insurance. There is no small group health insurance plan. Employees can purchase any qualified plan and receive reimbursement up to the amount of their allowance. Out of all small business health insurance solutions out there, "pure" defined contribution achieves the most controllable costs. That's because:

  • The business defines their budget by setting any contribution amount to employees’ health care. There are no minimum employer contribution amounts and no annual renewal increases or fees.

  • The business decides which employees to offer the health benefits to by using employee classes. This allows the business to focus resources on employees who are vital to the business. 

  • The business only reimburses employees for eligible premiums up to the amount of their health care allowance. Any unused fund stays with the company.

  • Defined contribution stretches the business's health benefits dollars farther. On the individual market, health plans are much less expensive than group coverage. And as of 2014 eligible employees can access health insurance tax subsidies.

What About Employees?

In addition to being a cost-effective solution for small business health insurance, the point of offering health benefits is to help recruit and retain the best employees. Employees love defined contribution because of:

  • Choice: Employees choose how to spend their allowance. They select their own individual/family health insurance policy that best fits their needs. They choose from any carrier and their preferred network of doctors. It's like a birthday present - you can get the sweater or the gift card. These days, most people value the gift card more.

  • Portability: Employees own their health insurance plan, and can keep it if they leave the business.

  • Guaranteed Issue and Renewability: Employees' individual health insurance policies are guaranteed renewable. This means they cannot be terminated by the insurance company unless they stop paying the premium. And, as of 2014 all individual and family health insurance policies are guaranteed-issue - meaning all employees can get coverage regardless of health.

  • Premium Discounts: As of 2014, most employees have access to significant tax subsidies through the health insurance marketplace. If an employee is eligible for a tax subsidy, what they pay out-of-pocket for health insurance is capped at 2% - 9.5% of their household income. An employee is eligible if their household income is less than 400% above the federal poverty line (that’s $94,200 per year for a family of 4 in 2013).

Questions about how to use defined contribution to manage small business health insurance costs? Leave a comment below.

The Comprehensive Guide to the Small Business HRA

Originally published on April 1, 2014. Last updated January 18, 2017.


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