Defined Contribution Health Plans — How Do They Benefit Your Small Business?

Two small business owners discuss defined contribution plan

Employee retention is a crucial part of reducing company costs. And a key part of employee retention is that your business offers access to quality healthcare coverage.

But you’re not a health insurance expert. You’re a small business owner with a small HR department and limited resources to navigate the health insurance industry. How do you offer comprehensive coverage and keep healthcare costs in line with your budget? The answer lies in two words: defined contribution.

What Is A Defined Contribution Health Plan?

A defined contribution health plan sets a specific dollar amount that an employer contributes annually to employees’ healthcare costs.

Here’s how it works: You, the employer, give each employee a fixed dollar amount, known as the “defined contribution,” for the employee to spend on their health insurance costs. (In California, the employee can choose from eight different carriers and more than 30 different plans, including HMO, PPO, EPO, and H.S.A. plans.) The employee then pays for their monthly premiums using the money set aside by the employer’s defined contribution.

The defined contribution plan is not a traditional “defined benefit” group plan, where the employer offers a specific group plan and benefits to employees. Instead, the defined contribution plan allows the employer to set aside money for employees to use on a health insurance plan of their choice. In short, it shifts the responsibility of selection from the employer to the employee.

What Are Its Benefits To Employers?

The defined contribution health plan offers the following incentives to the employer:

  • Contribution flexibility  The employer can set a specific (tax-deductible) amount to contribute to employees’ healthcare costs, giving employers greater financial predictability to plan and grow their business.
  • Reduced red tape — Since the employee picks the plan, the employer doesn’t waste time researching other carrier options at renewal. All they need to do is adjust their employer contribution and continue to offer all the same options.

The bottom line: A defined contribution plan allows employers to control their finances and cut administrative time that would otherwise be wasted on insurance policy management.

What Are Its Benefits To Employees?

Employees also benefit from the defined contribution health plan:

  • Spending flexibility — Employees receive a fixed (tax-free) allowance each month, which they can spend on health insurance costs.
  • Freedom of choice — Employees can shop for a policy from multiple carriers and plan types, rather than be restricted to an employer’s one-size-fits-all group policy.
  • Mobility — Employees can keep their policy through COBRA, even if they move to another employer.

The bottom line: Defined contribution health plans allow employees to choose and manage a health insurance policy that works best for them — which gives employees more choice, flexibility, and control over their healthcare coverage.

Ready To Shop For Defined Contribution Plans?

The Affordable Care Act has made individual, family, and employer-sponsored coverage more accessible and affordable. If you want to cut the red tape and financial uncertainty of managing a group plan for your employees, consider a defined contribution plan. This model allows you to sponsor coverage for your employees without having to administer and manage a specific policy.

Not sure which types of health insurance policies to offer your employees? Talk to a licensed agent at Regency West Insurance. We focus primarily on the group market, and we work with you to find the most creative, customized benefits solutions for your small business.

Go online to fill out a call back request form, or call us at (858) 699-0286. A licensed expert is standing by to help you navigate your health insurance options. We can’t wait to hear from you!