The general concept of a defined contribution health plan is that an employer gives each employee a fixed dollar amount (a “defined contribution”) that the employees can then choose how to spend towards benefits.
Controlling the Employer’s Rising Costs of Health Care
Recruiting and retaining employees is important to every company, and your employee benefits program is a key component of the compensation you offer to your employees. Due to the rising costs of traditional employer-sponsored health insurance, defined contribution health plans are gaining popularity across the U.S.
You decide how much, they decide what works.
With a defined contribution plan, you give your employees a set amount of money to spend on benefits – it’s like an allowance for their insurance – and they use that money to shop for the coverage that meets their individual needs. Instead of offering a “one-size-fits-all” health and benefits package, you empower your employees to choose the combination of coverage that’s just right for them.
You set up rules around where the money is spent.
For example, if you gave your employees a monthly allowance of $400, you could decide that $325 can be spent on health insurance, and $75 can be used for other coverage such as dental, a vision plan or other voluntary benefits.
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What are some of the advantages of a Defined Contribution Plan?
For Employers
• Control the employer’s rising costs of health care.
• Promote consumerism and wellness
• Flexibility to tailor the health and benefits allowance for your employees
For Employees
• Easy to understand allowance concept
• More freedom to choose from a greater number of plan options
• Potential for additional, more personalized coverage
• Decision support tools help employees decide which plans best suits their needs and the needs of their families
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Private insurance exchanges and how they work.
The best way to understand what insurance “exchange” is, is to think of it as an online marketplace. The employee experience is not unlike any other online marketplace such as Travelocity, Amazon or Expedia. It’s an online store where employees can purchase health insurance and other benefits. In most cases, the employer uses a defined contribution strategy to give each employee a set amount of money to purchase benefits. The employees and their families can then go shopping in the exchange with the money allocated by the employer and add additional money of their own if needed. Using online decision support tools provided by the exchange employees can receive guidance and education about the plans to help them make purchasing decisions.
Insurance exchanges offer multiple options of health insurance plans and may also offer other benefits, such as dental, vision, life, disability, and other options. Exchanges that are “private” are run by the health insurance carrier or other private industry, while “public” exchanges are run by the government.