A defined contribution health plan works best for companies that want to offer health benefits, but cannot offer group health insurance due to high cost or participation requirements. A common question is we receive is "what is the cost of a defined contribution plan?"
Defined Contribution Plan - A Simple Overview
Rather than paying the costs to provide a specific group health plan benefit (a "defined benefit"), employers can control their monthly costs by establishing a defined contribution health plan.
Defined contribution health plans are an affordable alternative to employer-sponsored group health insurance plans. Defined contribution health plans by themselves are not health insurance plans.
The general concept of a defined contribution health plan is that a company gives each employee a fixed dollar amount (a "defined contribution") that the employees choose how to spend. Employees then use their defined contribution to reimburse themselves for individual health insurance costs.
Defined Contribution Plan - How Much Does it Cost?
The cost of a defined contribution plan is 100% up to the employer. In other words, if a company wants to contribute any amount to employees' health care costs, they can afford a defined contribution plan.
To calculate the cost of a defined contribution plan, follow three simple steps:
Monthly or Annual Budget: Set an overall budget you can contribute to employee health benefits.
Allowance Amounts: Within the overall budget, set employees' allowance amounts (allocated monthly or annually).
Software Administration Fees: Factor in Defined Contribution Software fees. Fees will vary by administrator, but are usually charged as a one-time set up fee and per employee per month "PEPM" fee. As needed, adjust employee allowance amounts to stay within your overall budget.