Defined Contribution For Health Insurance

by Holley Maher

Ever heard someone in your company say something like this? “Let’s drop our group health insurance and send everyone to the government exchange.”

In theory that idea makes sense because the company saves money, employees get choices and the employer is no longer responsible for making decisions on the right deductible, copays and hospital network(s). However, implementation of this solution is problematic because of tax consequences, small provider networks, recruitment/retention issues and the potential of significant cost shifting to employees. In addition, companies with 50-plus employees must consider the taxable penalty that applies for failure to offer coverage.   

So … what is a business to do when faced with a significant premium increase?  

A big buzzword in benefits today is “defined contribution” (DC). The DC model appeals to businesses because it allows a company to control cost, provide employees with choices, offer tax-favorable benefits and manage burdensome compliance/administrative responsibilities.  
DC models have existed for years – however, some platforms are better than others. A few things to consider when moving to a DC model:

1.    Employer/employee cost

2.    Number and types of plans

3.    Administrative and compliance support  

4.    Employee decision support tools (critical if employees are new to making benefit decisions)

5.    Miscellaneous services

6.    Tax implications

At the end of the day, insurance cost is on the rise and everyone is looking for tools to manage cost. Just like when 401(k) plans (i.e., a DC model for retirement plans) took off in the 1980’s, a shift is happening with health insurance. Employers promise X and set basic rules on how money can be spent, and employees can leave it on the table or determine the best way to spend it. 

Holley Maher (hmaher@SmartBenefitsPlus.com) is a partner at Maher, Rosenheim, Comfort & Tabash LLC, specializing in group and individual insurance.