When evaluating Defined Contribution Health Plans, there are pros and cons to consider for your company and employees. This section outlines pros and cons of “pure” Defined Contribution Health Plans for employers and employees.
The four main pros of Defined Contribution for small businesses are: controllable costs, more time, tax savings, and employee recruiting and retention.
Controllable Costs: With Defined Contribution, the company sets and controls the cost of health benefits. Unlike traditional group health insurance, there are no minimum contribution amounts. Additionally, the company owns the allowance funds and the benefits are entirely employer-funded. Reimbursements are only issued to employees once they show proof of their expense. And, when the employee leaves the business, any unused funds generally stay with the business.
More Time for Strategic Work: Defined Contribution Health Plans reduce the administration time of health benefits. Using the right Defined Contribution Software Administrator, managing health benefits takes 5 minutes per month online.
Tax Savings: By using a Section 105 Plan as the foundation of the Defined Contribution Health Plan, companies see tax savings. Employers can deduct reimbursements as a business expense, and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%).
Recruiting & Retention: Many companies struggle to afford group health insurance, or cannot meet participation requirements. Offering a Defined Contribution Health Plan enables a company to offer (and advertise) health benefits when recruiting key employees. It also shows employees that the company cares about employees' healthcare.
The three main pros of Defined Contribution Health Plans for employees are: cost savings, choice of plans, and plan portability.
Cost Savings: Individual health insurance plans, on average, cost 20% - 60% less than group health insurance plans. Eligible employees are able to access discounts on their health insurance with the federal health insurance tax credits. And as an additional cost savings to employees, Defined Contribution reimbursements are generally excluded from employees' gross income.
Choice of Any Insurance Plan: With Defined Contribution Health Plans, employees choose the individual health insurance plan best for them, including the network of doctors. Employees can choose from any carrier and any type of plan (HMO, PPO, HDHP, etc.). Employees can purchase a plan through the new Health Insurance Marketplaces, through a broker, or directly from an insurance company. Additionally, employees can use their Defined Contribution allowance to cover the cost of supplemental coverage like dental or vision insurance.
Insurance Plan Portability: With Defined Contribution, employees purchase individual health insurance plans. Since individual health insurance plans belong to the employee (not to the company), the plan stays with employees if they leave the business.
The cons of Defined Contribution Health Plans for employers are:
A Change in Benefits Administration: Using a Defined Contribution Health Plan changes health benefits from a plan management role to a payroll function. Some companies perceive the administration as a con of offering health benefits in this way. And, with the wrong Defined Contribution Administrator this can be true. What's the workaround? Use an online Defined Contribution Software to completely alleviate this. With the right Defined Contribution Software, Administration takes 5 minutes a month and integrates with existing payroll systems.
Limited Tax-Benefits for Some Owners: With Defined Contribution Health Plans that use a Section 105 Plan as the foundation, some types of business owners receive limited tax benefits from reimbursements. In other words, some business owners may need to report reimbursements as taxable income. Read more on owner participation in Section 105 Plans.
Employer Must Comply to Avoid Costly Fines: Defined Contribution Health Plans that use a Section 105 Plan are group health plans and are subject to compliance with IRS, ERISA, HIPAA, ACA Market Reforms, and other applicable rules. As such, some employers perceive compliance as a con. To make sure your arrangement is compliant, and to make compliance easy, use a Defined Contribution Software Administrator.
There are some perceived cons for employees. But, with planning, education, and the right Defined Contribution software, these concerns can be addressed.
Reimbursements are Just That...: With a Defined Contribution Health Plan, employees must show proof of their insurance premium before being reimbursed. Paying up front for health insurance (rather than it being automatically taken out of a paycheck), is a change. To significantly alleviate this, companies should use Defined Contribution software that provides same-day processing of employees' reimbursement requests ("claims").
Change is Hard: Transitioning to a Defined Contribution Health Plan is a significant change in how companies offer health benefits, and how employees receive them. Even with all of the employee benefits listed above, it still means employees take on a new responsibility of managing their own health benefits. Employees become health insurance consumers (just like they are car insurance consumers). What makes all the difference? Work with an insurance broker to help employees choose individual health insurance policies, and choose a Defined Contribution Administrator that will help educate, train, and support employees on their new health benefits.