How defined contribution plans affect premiums for employers, employees

Increasing health insurance premiums have been keeping employers up at night knowing they could be facing renewal increases of 25 to 30 percent.

Health insurance helps with attracting and retaining talent. But employers could be over-insuring employees by providing benefits that don’t get used, unnecessarily elevating their costs and increasing expenses paid by employees. There are plan models that can eliminate that worry, though, while allowing employees to determine the coverage and costs that work for them, saving money for everyone involved.

Smart Business spoke with Jason P. Farro, principal at Benefits Resource Group, about defined contribution plans — what they are and how they compare to other programs.

What is a defined contribution plan?

A defined contribution plan is a strategy that gives employers an alternative approach to financing and managing health care coverage for their employees. Employers allocate a fixed dollar amount to employees to purchase health insurance that best fits their needs through e-commerce.

How does a defined contribution plan differ from a defined benefits plan?

The biggest difference between the two is the shift in benefit elections from the employer to employee. Today, in the group market, employers decide what plans to offer to employees. With defined contribution, employers are just allocating money and employees can use that money to buy a plan that fits their needs. It also means employees aren’t limited to the options selected by the employer. This gets rid of the notion that one size fits all and encourages employees to be more invested in the plan because it’s the plan they chose.

Why go with a defined contribution plan?

Plan sponsors, health plans, carriers and consultants have been searching for ways to control costs without sacrificing the quality of care. Defined contribution helps employers control costs by establishing a reliable budget for health care insurance while encouraging consumerism. Controlling an employer’s spend while increasing education will lead to health care that’s more cost efficient and of higher quality. Employers get a predictable employee benefit budget, which reduces concern about cost fluctuations.

Defined contribution plans are competitive, flexible and involve less administrative burden. There’s also a simple annual renewal process, so it’s not necessary to shop for benefit plans annually since plan decisions are in the employees’ hands. The plans also offer easy access to reports that show employees their payroll deductions and benefit structure through an online portal, which reduces much of the paperwork.

Have defined contribution plans become more or less popular recently?

They have become more popular, especially since the onset of health care reform and the often overwhelming increases in taxes and fees that come with it. Health care premiums are increasing regardless of the health risks associated with a group because the mandate to get insurance has dependents joining plans. Defined contribution plans help mitigate those costs because employers determine how much money is available to employees to apply to health insurance.

How are plans managed?

The employer and its consultant manage these plans.

Key to managing these plans is having the appropriate technology to administer the plan. Without the e-commerce site, defined contributions plans are not as successful. But technology today allows that portion of the plan to be managed seamlessly. The e-commerce site guides employees through the selection of a plan by asking questions and giving recommendations through needs-based analysis, ultimately compiling a package that fits the employee’s needs.

What savings might be realized by switching?

The savings come from consistency of expenses, enabling companies to budget with confidence year over year.

Employers can also reduce the administration required relative to traditional plans because employees have easy access to their benefits reports.

And because of the consumerism mentality that comes with managing one’s own plan, employees can select options that best fit their coverage and cost needs.

Jason P. Farro is a principal at Benefits Resource Group. Reach him at (216) 393-1850 or [email protected].

Insights Employee Benefits is brought to you by Benefits Resource Group

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