Small businesses address healthcare affordability with defined contribution
Health insurance is a central part of any business's benefits package, and it’s vital for attracting and retaining talented workers. For many small businesses, affordability can be a challenge. This is where a defined contribution funding strategy can help.
As the term implies, the employer defines their contribution to create a more accurate forecast for the cost of benefits. Since the business decides upfront how much it will contribute, the cost of benefits becomes a set line item in the budget. It also helps that contributions are tax deductible for employers.
What is defined contribution?
Under a defined contribution model, a business gives employees a fixed dollar amount per year, month or pay period, which employees can then put toward their health insurance costs. A small business owner might offer a menu of both health plans and voluntary benefits (like dental and vision) and provide each worker with the equivalent of an allowance or health insurance gift card to put toward the benefits he/she chooses.
With this approach, one employee may choose the high deductible health plan plus dental coverage, while another worker may bypass the health plan—because she’s covered through a spouse, for instance – and use her “allowance” for vision and life insurance benefits. This enables workers to choose the plans and coverage that meets their specific needs.
When this approach is a good option
Defined contribution allows employers to set and control health care spending, making it a good option for organizations seeking a low-risk approach with predictable costs.
It's also beneficial for companies with a diverse workforce, since employees can select their own benefits—giving them more choice and control over their healthcare coverage. This is a big advantage when you consider that of firms with fewer than 200 employees, 86 percent of those offering health insurance can only offer one plan, according to the National Federation of Independent Business.1
A defined contribution model can help employers expand the benefits options they offer, thereby satisfying employees who may have very different healthcare needs.
Determining how much you contribute
In 2015, the average small company-provided health insurance policy totaled $6,435 a year for individual coverage, with employers paying 82 percent of the premium, on average.2 Using these figures, moving to a defined contribution model would mean employers providing each worker about $445 a month to put toward his/her benefits.
Another approach is to simply divide your annual health benefits budget by the total number of employees estimated to participate. This is your average per employee contribution amount. Use this number for comparison as you review different plans to see how they each stack up.
Keep in mind, in most states employers must cover at least 50% of their employees’ monthly premium. (The cost is called a minimum contribution or cost-sharing percentage, and the employee pays the rest.)
How defined contribution benefits employees
A defined contribution approach encourages employees to become better healthcare consumers. How? They're choosing health benefits based on their needs and out-of-pocket cost differences between plans—not just deciding based on monthly premium amounts. They also have true visibility into the amount they're spending, along with the amount their employer is contributing, which helps them recognize the value of their benefits.
Also consider that contributing to employee health insurance can be potentially more cost-effective than raising an employee’s salary. Health insurance contributions are tax-deductible to the employer and tax-exempt for the employee.
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