How Defined Contribution Health Benefits Help Employers Recruit and Retain Employees
Feb 1, 2012
It costs a typical employer the equivalent of 6-9 months in salary each time they have to replace a salaried employee—that’s $20,000 to $30,000 for a $40,000 manager in recruiting and training expenses, along with the potential lost revenue from customers.
Employers can save approximately half of these expenses, $10,000 or more per replaced employee, with a health benefits plan that helps them recruit new employees and retain existing employees.
Defined contribution health benefits provide many advantages over traditional employer-sponsored benefits. Rather than paying the costs to provide a specific group health plan (a "defined benefit"), employers can fix their costs on a monthly basis by establishing a defined contribution health plan that gives employers and employees full control over healthcare costs. The employer’s costs are predictable and controllable, while employees are given full control over their healthcare dollars and choose a portable plan that meets their exact personal needs.
How do defined contribution health benefits work?
An employer gives each employee a fixed dollar amount (a "defined contribution") that the employee chooses how to spend. Typically, employees are allowed to use the defined contribution to reimburse themselves for personal health insurance costs or other medical expenses such as doctor visits and prescription drugs.
Under the traditional approach to health benefits, the company selects and funds the same insurance plan for all employees in a one-size-fits-all approach.
Alternatively, in a defined contribution approach, the employer designates a fixed amount of money, the “defined contribution”, and employees purchase personal health insurance directly from any insurance company they choose, selecting products that specifically meet their family’s needs and budget.
What is a personal health policy?
A personal health policy, sometimes called an "individual" or "family" health insurance policy, covers you and your designated family members. You purchase a personal health policy through a licensed health insurance agent who is appointed to represent the insurance companies in your state.
Personal health policies now cost one-third to a half of the price of similar-benefit employer-sponsored coverage in 45 states. This is primarily because insurance carriers in 45 states are allowed to: (1) price based on age bands and (2) reject or charge more to applicants for personal policies with pre-existing conditions.
If you or a member of your family are rejected or charged more for a personal health policy because of a pre-existing medical condition, you typically become eligible for state-guaranteed (“HIPAA-guaranteed”) or federally-guaranteed (“PCIP”) personal health insurance.
How do businesses determine the amount of money allocated to employees?
Providing different levels of benefits to classes of employees is at the core of benefits compensation and is routinely done by major corporations. With salary and other types of compensation, employers routinely compensate groups of employees differently. Field sales people are compensated differently than sales managers. Some employees get company cars, while others earn quarterly bonuses. Because health benefits are such an important part of compensation, why not provide benefits that vary by class of employee?
With defined contribution health benefits, businesses can create employee classes that offer benefits tailored to the company’s objectives, transforming a health benefit plan into a tool to find and keep great people.
For example, consider an electrical contracting company who struggled to hire and keep journeymen electricians in a very tight labor market. Instead of offering the same health plan to all employees, the company created separate classes for apprentices and journeymen and gave journeyman $350 more per month in their HRA. This large increase helps the company reduce attrition among journeyman. Plus, it creates a visible incentive for apprentices to complete the education required to become journeymen.
As there are no minimum or maximum contribution requirements, a business can design their defined contribution health plan to fulfill its exact recruiting and retention needs.
What types of healthcare expenses are eligible for defined contribution?
A defined contribution health benefits plan can cover any expense considered to be a qualified medical expense by the IRS, including premiums for health insurance policies. Note that employers may restrict the list of reimbursable expenses in any way they choose. Some common categories of reimbursable items include health insurance premiums, doctor visits, dental, vision, pharmacy and hospital expenses.
What are the advantages and disadvantages of defined contribution?
For employers, the primary advantages of defined contribution health benefits include fixed costs, flexible plan design, and reduced cost and administration responsibilities. Additionally, there are no minimum participation requirements for defined contribution health benefits.
For employees, the primary advantages include more choice, portability, and in most states, reduced healthcare costs.
The primary disadvantage of defined contribution health benefits is that some individuals/families (typically 10-20 percent of the workforce) with pre-existing medical conditions may have to pay more for health insurance than they would with traditional employer-sponsored coverage. However, in 2014, this disadvantage will be eliminated when individual policies become guaranteed issue.
As such, businesses with unhealthy workforces may find a traditional approach more suitable until 2014 if a group health insurance plan is affordable.
What is the market for defined contribution health benefits?
Approximately 50 percent of U.S. small businesses with less than 50 employees do not offer traditional employer-sponsored health insurance to their employees. This figure is expected to greatly increase in 2012 due to:
- Employer Contribution Requirements – Insurance companies require a minimum percentage of the premium for each employee that must be paid by the employer, or the entire plan is cancelled.
- Employee Participation Requirements – Insurance companies require a minimum percentage of employees join the group plan, or the entire plan is cancelled.
- Cost per Participant – Group health plans for 2012 are potentially facing the greatest rate increases in the history of U.S. health benefits, due to increasing health care costs and new coverage requirements imposed by ACA (2010 Health Care Reform).
Defined contribution health benefits directly address each of these issues. With a defined contribution health plan, there are:
- No Employer Contribution Requirement – The company sets a fixed dollar amount that it wishes to contribute to each class of employee.
- No Employee Participation Requirement – The company sets its own eligibility and participation requirements. The plan can be active even if only 1 employee participates.
- Lower Cost Per Participant – Individual health policies typically cost less than half the cost of equivalent group coverage for healthy employees, and new options, such as PCIP, are now available for employees who don’t qualify due to pre-existing medical conditions.
Recruiting and retaining key employees is essential to every business, and a company's health benefit program is a key part of the compensation they offer to their employees. Due to the rising costs of traditional employer-sponsored health insurance, defined contribution health benefits are gaining popularity in the U.S. Rather than paying the costs to provide a specific group health plan (a "defined benefit"), employers might want to consider fixing their costs on a monthly basis by establishing a defined contribution health plan.
About The Author
Rick Lindquist is President of Zane Benefits (www.zanebenefits.com), the leader in defined contribution health benefits. Zane works with brokers, agents and CPAs to transition clients to defined contribution solutions. Rick received his B.S. in Economics and B.A. in Computer Science from Duke University. Follow Zaneatwww.zanebenefits.com/blog. Reach Rick at 435-200-6717/rick.lindquist@zanebenefits.com.
