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Small Business Employee Benefits and HR Blog

The Top 3 Ways Defined Contribution is Changing in 2014

April 24, 2014
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Defined Contribution is one of the biggest healthcare buzzwords of the year, and experts agree there is a massive shift in the market from employers offering a 'defined benefit' to offering a 'defined contribution'. Just as the healthcare industry is evolving, so is the concept of Defined Contribution. Here's a look at the top three ways Defined Contribution is changing in 2014.

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1) New Versions of Defined Contribution Emerging

Defined Contribution means that the employer defines their contribution to employees' healthcare, instead of defining the exact health benefit. Within this broad definition, Defined Contribution can mean different things. There are two primary Defined Contribution Models.

  1. "Pure" Defined Contribution Model: Employees are offered an allowance to use on individual health insurance (through a private individual health insurance exchange, or not).

  2. Defined Contribution with Group Health Insurance Model: Employees are offered an allowance to use on a limited menu of group health insurance plans.

2) Major Advantages to the Individual Health Insurance Market

The individual health insurance market is undergoing significant change. The Affordable Care Act (ACA) introduced new reforms in 2014 that make individual health insurance more affordable and accessible.

The individual health insurance market is expanding rapidly. Many employees can now get the same or better coverage on the individual market for less than what they pay for group health insurance coverage. Employers see these advantages and are using a Defined Contribution Model to send employees to the exchanges, and still provide a valued health benefit.

3) New Ways of Structuring "Pure" Defined Contribution

Defined Contribution is a health benefits strategy. The vehicle the employer uses to set up and structure the Defined Contribution Health Benefits varies.

One vehicle many employers used in the past for a "Pure" Defined Contribution Model was a stand-alone Health Reimbursement Arrangement (HRA). As most in the industry are aware, new ACA regulations (specifically PHS 2711 and PHS 2713) restrict how employers can use stand-alone HRAs. Therefore, stand-alone HRAs are no longer a compliant base for most companies' Defined Contribution Model (unless it is a one-person HRA plan).

Because of this change, most employers who were using stand-alone HRAs as the vehicle for their Defined Contribution Health Plan are transitioning to a limited Section 105 plan, such as a Healthcare Reimbursement Plan.

What other changes to defined contribution are you seeing in 2014? Join the discussion with a comment below.

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