Defined Contribution: Drop Group Employer Coverage and Switch to Individual Health Insurance

Every small business owner or HR manager wants to spend more time on strategic issues, and less time renewing health insurance plans.

With defined contribution health benefits, administration becomes a payroll function. Once set up, administration takes 5-10 minutes a month.

Once the plan is set up, the business’s administrative activities include:

Adding approved reimbursements to payroll.
Enrolling new employees online.
Terminating employees from the plan when they leave the company.
Providing education to employees about the benefit.
Connecting employees with an insurance agent for insurance questions.

Tip: Defined contribution health benefits software is key to managing these administrative aspects in a painless, compliant, and efficient way.

The Result?

A Guide to Lovable Employee Health Benefits

Create Affordable Health Benefits Employees Will Love

Introduction

For businesses to thrive in today’s economy, finding and retaining the best employees is top priority. This is especially true for small businesses competing with larger businesses, and larger budgets, for top talent.

Additionally, the landscape of employer-provided health benefits is rapidly changing. Businesses need new ways to offer the same (or better) health benefits at a controllable cost.

Happy Employees Help Your Business Thrive
Frequent voluntary turnover has a negative impact on employee morale, productivity, and company performance. Recruiting and training a new employee requires staff time and money.

Every time a business replaces a salaried employee, it costs 6 to 9 months’ salary on average. For a manager making $40,000 a year, that's $20,000 to $30,000 in recruiting and training expenses.

On the flip-side, retaining employees who are committed, loyal, and embody the business’s mission are what gives your business its competitive edge.

Conclusion
We hope this guide has given your business the foundation for creating health benefits that employees love.

Because of the unsustainable costs of group health insurance, and the new individual health insurance opportunities with health care reform, educated businesses are transitioning to defined contribution health benefits to give employees access to equal or better health insurance, at a controllable cost, with less administrative time.

Next Steps
For a business transitioning to defined contribution health benefits, or for a business using defined contribution to offer health benefits for the first time, here are the next steps:

Set a date to cancel your group health insurance plan (if you have one).
Define any amount you can afford for health benefits.
Use a Defined Contribution Software provider to:

o give each employee a fixed dollar amount to use on premiums,

o develop a customized transition and on-boarding plan, and

o educate employees on their new plan.

Select any insurance professional to give employees a resource in selecting the best plan.

Coverage for All Employees
As of 2014, all employees (regardless of health conditions) are able to purchase an individual health insurance plan that is equal or better for them than existing group health insurance options.

Access to Health Insurance Subsidies
Employees can use their health care allowance to purchase policies from the new Health Insurance Marketplaces. This gives them access to federal health insurance tax subsidies to lower the cost of their premium. Eligibility for the tax subsidies is based on income and household size. Households with income up to 400% above the federal poverty line (FPL) will be eligible (up to $45,960 for an individual in 2013, or $94,200 for a family of four in 2013).

About this Guide
Offering health benefits through a defined contribution approach allows your business to provide health benefits that employees love, while staying within your business’s health benefits budget.

Small and medium-sized businesses are transitioning to defined contribution health benefits because of:

1) Controllable costs
2) Happier employees
3) Painless administration

This guide provides an overview of these three benefits.

1) Controllable Costs
Being able to set, control, and predict all health benefits costs is revolutionary for many businesses.
Defined contribution health plans give your business controllable costs by offering the following features:

Define your budget by setting any contribution amount to employees’ health care.
Give employees monthly health care allowances (via an IRS-approved Medical Reimbursement Plan).
Employees purchase individual health insurance policies and submit expenses for reimbursement. The business reimburses employees on payroll.
The business only reimburses employees for eligible premiums up to the amount of their health care allowance.

Without annual renewal increases or minimum contribution amounts, the business is free to control all benefit costs.

Tip: Employees will only be eligible for the tax subsidies if the business chooses not offer group health insurance. Read more on the individual health insurance subsidies here.

Predictable Costs for Employees
Employees have a clear budget to spend on health insurance. Individual plans are, on average, 20 to 60% less expensive than the same group coverage.

Easy to Use
Lastly, employees value health benefits that are easy to understand, and easy to use. Similar to the transition from pensions to 401(k) retirement plans, the defined contribution health benefits approach requires employees to take more control of their health benefits.

Defined contribution administration software provides employees easy access through an online portal where they can see benefit information and submit requests for reimbursement (“claims”).

3) Painless Administration

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2) Happier Employees
In order for a health benefits program to work, it has to meet the business’s budget and provide value to employees. The following aspects of defined contribution health benefits contribute to happier employees.

Access to the Best Health Care

Because employees choose how to spend their health care allowance, including which individual health insurance policy to purchase, they can pick the health coverage that best meets their needs.

Employees say they no longer want a one-size fits all health insurance plan. Rather, they want the options to customize their health benefits.

With defined contribution plans, employees select:

Any type of plan, from any insurance carrier.
The network of providers and doctors they want to see.
Coverage to fit their health needs (maternity coverage, prescription, HSA-plan, etc.).
The level of deductible, co-pays, co-insurance, etc.

Tip: Because some employees may not be comfortable selecting an individual health insurance policy on their own, you may want to designate an insurance professional to help employees select individual policies. This also shows employees you care about them and want to improve their health benefits.

While some turnover is inevitable, a strategic employee recruiting and retention strategy mitigates the turnover and associated costs for a small business. Employee health benefits are a key part of the compensation offered to employees, and therefore vital to employee recruitment and retention programs.

The New Way of Offering Health Benefits
Businesses are transitioning to defined contribution health benefits because it offers predictable costs to the business, while providing employees access to quality health insurance.

Defined contribution health benefits reduce the cost and time associated with traditional health insurance, while maintaining all of the benefits employees love.