Defined contribution health plans are becoming more and more popular. A recent study found that 47% of employers are moving to defined contribution, with another quarter of employers considering it.
As your company or client considers this approach, the most common question is "how does it work?". Here is a simple overview - the nuts and bolts - about how "pure" defined contribution health plans work.
Tip: In this overview, we are talking about "pure" defined contribution. With this type of defined contribution health model, the employer provides health insurance allowances that employees can use on any qualified individual or family health plan.
How Pure Defined Contribution Works
- Determines contributions
- Sets eligibility
- Picks start date
- Enrolls employees
- Sends welcome kits
- Purchase individual policies with their own money (just like car insurance)
- Submit "expenses" for reimbursement
The Defined Contribution Software Provider...
- Adjudicates employees "expenses" (for compliance with HIPAA and other federal regulations)
- Reimburses employees for "expenses" (like business expenses reimbursement)
The Health Insurance Broker...
- Helps employees select and purchase individual policies (ie: sells the health insurance)
We write a lot about how defined contribution works for employers, employees, and brokers. See related articles:
- How to Set Up a Defined Contribution Health Plan
- How to Pair Defined Contribution with Health Insurance Subsidies for Cost Savings
- What is the Cost of a Defined Contribution Plan?
- Why Use Defined Contribution Software?