What Is Defined Contribution?
Defined contribution is what many experts now consider to be the ideal solution to group health insurance for employers and their employees. So what is defined contribution? It is sometimes referred to as a “defined benefit”. It allows a company to fix their monthly healthcare benefits cost and provide an alternative to the “one size fits all” company sponsored health insurance plan. In most cases is more beneficial to both the employer and the employee.
Defined contribution is the perfect scenario for healthcare reform and the changes that we have come to know as the affordable care act.! Defined contribution is not a new concept it has actually been around for long time. You may have heard of a cafeteria plan concept? Because of underwriting and pre-existing condition exclusions employers where often forced to offer their employees groups health insurance so that more people were eligible for coverage and not penalized for pre-existing conditons. So defined contribution was used only on ocassion.
Health insurance plans were subject to underwriting and were employer driven. Meaning that(very simply put)the employees had to fill out extensive health history forms, then the insurance company would take all the information gathered and give rates based on this information. Then the employer would choose a plan and that was the insurance plan the employees got, if they wanted to use their employer sponsored health plan. Also, if you had a pre-existing condition you may not have been able to get coverage for those conditions unless it was through an employer sponsored group health insurance plan.
There is no longer medical underwriting, all plans are “guaranteed issue”. Simply put this means that as long as you can pay for the coverage the insurance companies are offering they have to issue it to you (no more pre-existing condtions). They can no longer discriminate against health conditions and all qualified health plans will include all of the essential benefits as defined by the affordable care act. People who used to have to rely on working for a company that offered a group health insurance plan can now get Insurance in the individual market. In most cases the insurance on the individual market is less expensive than on the group market. So it is easy to see why it would be more beneficial to both the employer and the employee if the employer does not provide a group health insurance plan. The employee can then get coverage through an individual plan of their choice. These plans are portable(within states) so you can keep your insurance plan even if you change employers. They can choose their coverage. Do they need a low deductible or a high one? Prescription coverage or not? Co-pays or no co-pays? What network of Physicians would they prefer to see? Not every family has the same needs when it comes to health Insurance. Unfortunately with the group insurance structure the employer had the excruciating task of pick out the coverage and the employee had no choice in the matter.
With a defined contribution plan:
For the employer:
– There is no minimum contribution. The business determines what contribution amount it will contribute, which allows them to control costs and makes healthcare costs predictable.
–There is no minimum participaion required by employees to have this plan.
–The ease of administraton is unmatched. Spend less than 5 minutes a month to administer and best of all, no annual renewals.
–If an employer offers an insurance plan, their employees are not eligible for the federal tax subsidy. Which will cost both the employer and the employee more in health insurance cost. However, by using a defined contribution plan the employer sets their contribution towards the employees non subsidized portion of their health insurance. The employee, if eligible, will also get some assistance from the federal tax subsidy thus making it more affordable for both.
For the employees:
–Employees can now purchase their own individual/family policy. They can choose the coverage, the benefits and the pricing that best fits their needs.
–The employees can choose the insurance company, the network of providers and the doctors that their family uses.
–The employees can choose the level of deductible, their co-pays, their co-insurance, etc. that is best for them and their family.
–The only way to give employees access to the federal subsidies is to not offer them an ”affordable” group health insurance plan.
Why are most businesses expected to switch to a defined contribution plan?
Lets face it companies do not want or like having to be in the health insurance business. How much time is wasted in your business dealing with health insurance in one form or another? Whether it is time spent trying to figure out all of the new health care reform changes and annual renewals,or helping an employee figure out their new coverage, adding new employees, removing old employees, answering question, calling the providers, submitting claims etc.? It is time away from your business. Time you do not get reimbursed for and never get back! Employees love having a choice of insurance options and being in control of their families needs. Defined Contribution is a win-win solution.