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Small Business Employee Benefits and HR Blog

What is the Cost of a Defined Contribution Plan?

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?"

Cost of Defined Contribution Health 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:

  1. Monthly or Annual Budget: Set an overall budget you can contribute to employee health benefits.

  2. Allowance Amounts: Within the overall budget, set employees' allowance amounts (allocated monthly or annually).

  3. 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.

With defined contribution plans there are no minimum or maximum contribution amounts so the employer truly does define and control all costs of a defined contribution plan.

Defined Contribution Plan Design Worksheets - Free Guide

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