The concept of Defined Contribution is not a new one, but it is newer for small and midsized businesses. Defined Contribution models have helped large businesses control their costs and provide more choices for their employees.
For small and midsized businesses, this was not an option in the past due to insurance company restrictions on the number of plans a business could offer to employees. The larger the business, the more options the insurance companies allowed them to offer.
As the cost of providing health care increased, there became a need for a new way to offer insurance that made sense for both the employer and the employees.
“The truth is the best plan for the business and the best plan for the employees are usually two very different things,” says Craig Pritts, senior sales executive at JRG Advisors. “The best plan for the business is usually the most cost-effective plan and the plan that most employees would prefer to have is usually the most expensive plan.”
Smart Business spoke with Pritts on how Defined Contribution can work for both employers and employees.
What is the basic model for a Defined Contribution plan?
The model allows a business to establish its contribution to the employees’ benefits and provides a menu of choices for the employees to select from. The menu may only include medical coverage or may include a long list of benefits such as dental, vision, life, disability and even pet insurance in some cases.
Some insurance companies offer this on a private exchange or an electronic platform. The private exchange is built specifically for business. The employers’ contribution is pre-populated and the plans are loaded on the website. The employees are then provided a login to the website where they can shop for the plans that are best for their needs.
Some insurance companies do not use a website at this time, but simply allow the employer to offer more than the traditional one or two plans.
What are some of the benefits for employers and employees?
There are a lot of benefits to both the employer and employees when using a Defined Contribution platform. Business owners find great benefit by controlling their costs, budgeting for future years and reducing the time spent trying to determine the best option for both the business and employees.
Employees love the choice and flexibility of deciding how their money will be spent by selecting the plan that is best for their coverage needs. Experience shows that most employees, when given a choice, will select a different plan than the one the employer provided when the same plan and employer contribution are provided.
The number of businesses using this model has been increasing every year and experts predict that most insurance plans will be offered on an exchange in the next few years.
What else should employers know about Defined Contribution?
The concept of Defined Contribution is also used by the marketplace on the Small Business Health Options Program (SHOP). There are guidelines a business must meet to use the SHOP based on number of employees, average wages and employer contribution.
The SHOP also may provide a business tax credit for groups that meet guidelines set by the Affordable Care Act. In 2015, an employer may only select one plan for the employees, but in 2016 an employer will be able to define its contribution, select the metal level it wishes to offer, and the employees will be able to select a plan from multiple insurance companies within the selected metal level.
Over the last few years, the health insurance industry has seen a lot of changes that have resulted in most businesses waiting and reacting to the changes. This concept gives employers a tool to be proactive in controlling their health care costs.
Insights Employee Benefits is brought to you by JRG Advisors