Nonprofits value providing health benefits to their employees. For many nonprofits, however, a traditional group health plan may not be cost effective for employees or for the organization. A defined contribution strategy paired with individual health insurance offers an alternative to traditional health insurance plans. This strategy is gaining popularity with nonprofits, as it provides a way to offer employees excellent health benefits without bearing the cost or risk associated with traditional health insurance.
Why Nonprofits Want to Offer Health Insurance, But Struggle To Do So
Small nonprofits face unique challenges in hiring and retaining employees. With limited resources, leadership teams must be strategic about how to allocate compensation and benefit dollars.
When it comes to health benefits, controlling costs has become a major challenge. Over the past fifteen years, the average national cost to cover an employee with group health insurance has increased 174 percent. That is an average of 12 percent per year (Kaiser Family Foundation, 2014).
The Department of Health and Human Service’s Agency estimated there were over 500,000 nonprofit employers in the US in 2013. Of these nonprofits:
Nearly half had fewer than 10 employees and two-thirds had fewer than 50 employees.
Only 47% with fewer than 50 employees provide employees health insurance coverage.
Small nonprofits have been hit particularly hard, as increased premium costs and decreased coverage have been sharply felt by both the organization and employees, alike.
New Health Insurance Options for Nonprofits
As a result, educated nonprofits are switching employees to individual health insurance and reimbursing employees’ premiums, or a portion of premiums, through a defined contribution health plan. Defined contribution (aka individual health insurance reimbursement) offers nonprofits sometime new - flexible, cost-controlled, and sustainable employee health benefits. The concept is simple:
- Cancel the group health insurance plan (if offered).
- Define any amount the organization can afford for health benefits (no minimum or maximum contribution amounts).
- Use Defined Contribution Software to give each employee a fixed dollar amount to use on personal health insurance.
- Provide employees with information and resources on where and how to select their own health insurance policy.
Then, employees purchase their own individual/family policies, and choose how to spend their healthcare allowance. Eligible employees can use their allowance to purchase subsidized policies through the Health Insurance Marketplace.
A defined contribution approach is an affordable alternative to an employer-sponsored group health insurance plan. As you can see, defined contribution plans by themselves are not health insurance plans. Rather, they are an affordable way to offer health benefits to employees.
Fiscal Control & Predictability
One reason nonprofits offer a defined contribution health plan is it gives the organization complete control of the cost and design of the benefit, allowing a nonprofit to meet their budget and provide predictability to the board of directors. For example, the organization decides:
- Amount of the health insurance allowances, and the ability to design different allowance amounts by class of employee (ex: $250/month for Directors and $125/month for Case Workers).
- Employee eligibility criteria (ex: a waiting period for new hires or eligibility based on hours worked weekly).
- Employee cost-sharing options (ex: reimburse employees for 80 percent of premium cost, up to the amount in their balance).
For smaller nonprofits, defined contribution (individual health insurance reimbursement) is the emerging way to offer valued employees health benefits.
With individual health insurance, employees pick the plan that best fits their needs, including the doctor, keep the plan for as long as they want, and save money.
With a reimbursement program, the nonprofit has a flexible, affordable health benefits program that helps recruit and retain the best employees.
As a result, many nonprofits see savings of 20 to 60 percent on healthcare costs.
What questions do you have about nonprofit health insurance or about individual health insurance reimbursement? Download this complimentary guide or leave a comment below.
Editor's Note: This post has been updated with the most current health insurance information. The article was originally published in April of 2013.