Defined Contribution: Helping Employers Control Costs While Giving Their Employees More Options
Now that the Affordable Care Act (ACA) is upon us, there are an array of both public and private insurance exchanges for individuals to shop for their own health insurance. And with the defined contribution model, employers can control the escalating costs of providing health insurance, while shifting responsibility (and control) of health insurance back to their employees at the same time.
Defined Contribution should not be confused with defined benefit, which is the most common option for offering health benefits to employees. In this traditional model, employers offer a pre-selected, menu of healthcare plans. What plans to make available are typically at the discretion of the employer, with employees usually having little to say in the matter. And with costs escalating at an alarming rate (especially in cases when a group policy experiences large claims by a few of its members), plans were chosen based on keeping these costs contained as much as possible—not upon what might be in the best individual interests of the employee.
Defined contribution plans now offer the best of both worlds: employers can choose a set amount ($) to contribute towards an employee’s healthcare (thus controlling their own costs while still helping their employees obtain coverage). The employee now has the control (and responsibility) for researching and purchasing their own health insurance. While this model is already often used for retirement funds (401 Ks), many employers still are not fully aware of how they can utilize this new approach in making health insurance available for their employees without the risk of escalating costs.
Here are five facts that every employer should know:
Defined benefit (DB) plans and defined contribution (DC) plans are not just different…their opposites
DC plans and DB plans, as we have already alluded, are not just different—they are opposites. Defined contribution plans give employees flexibility and control over their healthcare benefits that they did not have before. Under the DB model, employers have limited options and bargaining power in the small-group market, which does not have a wide range of plans to choose from. In fact, research indicates that among companies with 199 workers and under, 86 percent of those—who do offer coverage—only offer one plan. Defined Contribution puts the power of choice back in the hands of employees, while their employers can help make coverage available with minimal risk of escalating costs.
Defined Contributions Plans takes the hassle of administering health benefits off employers’ backs
How much time does company administration and HR staff deal with managing their health insurance plans? The hours are beyond measure—as are the costs. Defined contribution plans free employers from the administrative shackles that come with choosing and managing their employees’ health plans.
In addition to saving time and money, Defined Contribution plans can can also relieve tension between employers and employees (or let’s be real: employee complaining!) by letting their people choose their own plans (with generous help from their employer) instead of forcing everyone into a single option.
Defined Contribution Plans helps small business focus on what they do best: run their business!
We have already outlined how DC plans help businesses. The control of costs, and the relief of the hassle is huge for smaller employers do not have full-blown human resources departments to deal with it all. And this is the last thing that the business owner wants to deal with (nor is he or she likely qualified).
And as far as the claim goes for Defined Benefit health insurance that a business can use its size to negotiate “better rates and better coverage” for its people: poppycock! Indeed, small businesses are by definition small, and they have little capacity to exert such negotiating power.
Defined Contribution plans are better for the employee
One of the biggest drawbacks of employer-sponsored health insurance is the lack of portability. In those cases, in reality, the plan does not belong to the employee but to the employer. What if an employee wants or needs to change jobs? With a defined contribution plan, he can keep his current policy. It also reduces the chances of having to change doctors, be stuck in a miserable job, or be left uninsured during transition periods.
When competition is present, everyone wins. This is a central focus of Defined Contribution health insurance. It allows employees to choose the best plans for themselves and their families at the best price.
The Big Surprise (Not!): Current laws and regulations discourage Defined Contribution plans.
Today, a business can use what is referred to as a “Section 125 Cafeteria Plan” to extend coverage to their people through a Defined Contribution plan. The problem is that it’s easy for a small business to run into trouble over the nuances of 125s. It must look out of anti-discrimination privileges as related to highly-compensated employees or high-cost health coverage.
Also, Section 125 plans cannot be used to buy insurance offered through an exchange (or if the employer is exchange-eligible under PPACA.) Section 125 plans are also only available to employees—NOT the business owners. The Section 125 option is currently the ONLY vehicle that permits an employer to provide a Defined Contribution Plan. The 2010 healthcare law does allow a limited DC capability in the SHOP exchanges. However, the choices will be limited, and the employee will not be able to carry these policies from one employer to another.
This is where we can help. We are experts in helping employers set up and save money, and do right by their people through Defined Contribution plans. But it is still a minefield out there, and we know where they are hidden. If you would like to learn more, then we invite you to reach out to us.
To have knowledge is to be empowered. We welcome the chance to empower you. We can also be found on many of the social media sites: Facebook, Pinterest, LinkedIn, and Twitter.
Matthew Byrne has made a career helping people find affordable health insurance in Ohio. He is the founder of MyHealthQuoter.com, a Dublin-based brokerage providing Ohio health insurance quotes and services for individuals, families and corporations. Mr. Byrne is a subject matter expert speaking frequently about Health Care Reform, Defined Contribution Programs, COBRA, and Medicare. He can be reached at (614) 336-3636, and online at www.MyHealthQuoter.com.
Need a Health Reform Speaker? Find Matt on COPEC! http://copeceducation.org/speaker/Matthew.Byrne