Rather than paying a portion of the costs to provide a group health benefit like group health insurance, employers can control their costs by establishing a Defined Contribution Health Plan. These plans can be implemented through the use of pre-funded accounts like a health savings account (HSA) or through a commitment to reimburse employees through a health reimbursement arrangement (HRA).
The general concept of a Defined Contribution Health Plan is that an organization gives each employee a fixed dollar amount (a "Defined Contribution") that the employees choose how to spend. Typically, employees are allowed to use their Defined Contribution allowance toward qualified out-of-pocket health expenses like insurance premiums and medication.
Defined Contribution Health Plans are programs that allow employees to be more involved in their health care choices. With a Defined Contribution Health Plan, employees are responsible for selecting an individual health insurance plan and making payments out of their own finances upfront, then getting reimbursed from the funds in their DCHP.
Defined Contribution Health Plans offer an alternative to “defined benefit” group health insurance. Just as employers have moved away from defined benefit retirement pensions and toward Defined Contribution 401(k)s, many employers are applying this model to their health benefits programs.
The general strategy of a Defined Contribution Health Plan is that:
Defined Contribution Health Plans by themselves are not health insurance plans. Defined Contribution plans give the employer control of benefits while giving employees choice and a great benefit. Note however, that if an applicable large employer uses an ICHRA, which requires employees purchase minimum essential coverage, the plan will meet the employer mandate. In addition, it’s important to note that employers must offer an affordable allowance. Learn more about calculating affordability HERE.
A common reason employers use a Defined Contribution Health Plan is it is a self-funded health plan, which gives them control over exactly how much they spend. With a fully-insured health plan, the costs are controlled by the insurance companies.
Many employers who do not qualify for group health plans or simply can’t afford them often resort to offering taxable wage increases. A Defined Contribution Health Plan is free of payroll taxes for both the employer and employee. As long as the employee uses money to purchase minimum essential coverage, it is also free of income taxes. This makes employers’ benefit dollars stretch a lot farther.
On top of it all, a Defined Contribution Health Plan doesn’t have to be a standalone benefit. Employers who are already offering a group health plan can offer a group coverage HRA (GCHRA) alongside the group plan, and there are a few ways to do that, depending on your needs. The best way to figure out which type of Defined Contribution Health Plan to offer is by taking our quiz below.
PeopleKeep offers Section 105 Plans that meet nearly every employer need, including: a Qualified Small Employer HRA (QSEHRA), an Individual Coverage HRA (ICHRA), and a Group Coverage HRA (GCHRA). Choosing the one that is right for you can feel complicated, so we’ve broken it all down with our HRA comparison chart.
Compare our three HRAs using the chart below:
Feature |
QSEHRA |
ICHRA |
Group Coverage HRA |
Business size restrictions |
Limited to businesses with fewer than 50 FTE employees |
None |
None |
Allowance amount restrictions |
Limited to $5,450 for self-only employees and $11,050 for employees with a family in 2022. Businesses cannot give different employees different allowance amounts based on criteria other than family status. |
None |
No minimum or maximum contribution requirements. Businesses can give different employees different allowance amounts based on job-based criteria. |
Group health policy requirements |
Can’t be offered with a group health policy |
Can be offered with a group health policy, but employees cannot have a choice between the group policy and the HRA. |
Must be offered with a group health policy |
Individual health policies permitted |
Yes |
Yes; in fact, they're required for participation in the HRA. |
No |
Premium tax credit coordination requirements |
Employees must reduce their premium tax credit by the amount of their HRA allowance. |
Employees cannot collect premium tax credits and participate in the ICHRA. However, if the ICHRA allowance is considered unaffordable, employees may waive the HRA and collect the credits. |
N/A. These HRAs can’t reimburse employees for individual premiums. |
Annual rollover permitted |
Yes |
Yes |
Yes |
Medical expenses available for reimbursement |
Any or all items listed in IRS Publication 502 |
Any or all items listed in IRS Publication 502 |
Any or all items listed in IRS Publication 502 with the exception of individual insurance premiums |
Employee eligibility guidelines |
All full-time employees are eligible. Businesses can decide on part-time employee eligibility. |
Businesses can decide on eligibility based on 11 different employee classes. |
None |
Defined Contribution Health Plans work for employers and employees because:
There are three key questions to ask when designing your Defined Contribution Health Plan.
These two questions will help you customize a plan that achieves your employee health benefit goals (and meets your budget):
Your organization will decide when your Defined Contribution Health Plan will start.
You probably already have a budget in mind for health benefits. Within this budget, how will you divide up employees' monthly allowances? If you offer an HRA, you will come up with a monthly allowance that employees can use toward health expenses.
With an HRA, you can provide the same monthly allowance amount to all employees, or you can provide different monthly allowances to different types/classes of employees. If you offer an ICHRA, the employee classes must be based on bona-fide job criteria such as job title, location, etc. You can also vary the allowance amounts by family status (single, married, etc.) within an employee class.
See: The individual coverage HRA (ICHRA)'s employee classes: How do they work?
Defined Contribution Health Plans that use a Section 105 Plan as the foundation are considered group health plans. As such, they must comply with IRS, HIPAA, COBRA, ERISA, and the Affordable Care Act (ACA) rules.
This section details compliance requirements that may impact your Defined Contribution Health Plan.
(Only for plans with 20 or more participants)
60-Day Notice of Material Modification: The ACA requires employers to provide 60 days advance notice to participants when making material modifications to their group health plan (including Defined Contribution Health Plans).
Depending on the HRA, you have the ability to make the health benefit to certain classes of employees. To learn more, see our article on employee eligibility
The biggest difference between health reimbursement arrangements (HRAs) and health savings accounts (HSAs) is that the business owns the HRA while the employee owns the HSA. In addition, an HRA is a reimbursement arrangement between an employer and employee, whereas an HSA is a savings account that is owned by the employee. To learn more, see our article on HRAs vs. HSAs.
Yes! And you should take advantage of both. Unique rules apply to users, especially regarding what items are available for reimbursement when an HSA is in place. To learn more, read our article on using HRAs and HSAs.
HRAs can reimburse many health care products and services, including the following types of insurance premiums, provided they were not already paid with pre-tax dollars: Major medical individual health insurance premiums; Dental care and vision care premiums; Qualified ancillary premiums (e.g., accident policies); Medicare Part A or B, Medicare HMO, and employer-sponsored health insurance premiums; Medicare Advantage and Supplement premiums; and COBRA premiums. To learn more, read our article on reimbursing premiums with an HRA.
Disclaimer: The information provided on this website is general in nature and does not apply to any specific U.S. state except where noted. Health insurance regulations differ in each state.
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