Defined Contribution Basics

Most of us know from personal experience about defined benefit health plans. An employer offers a limited number of plans which are often two or three options from a single insurance carrier. Then employees are able to select the option that best fits their needs. However, increasingly for healthcare benefits, the defined contribution model is a popular trend for employers funding their employees’ benefits. What’s the difference? With defined contribution, every employee is given a predetermined monetary contribution that they can use to shop from a variety of different health plans through a private marketplace.

This is good news for employees because these marketplaces allow for a more diverse range of medical and voluntary benefit offerings. It’s up to employees how they allocate their defined contribution dollars and whether they want to spend their own money on top of it. For example, if an employee knows that they will visit a physician regularly, they might opt for a PPO. An HDHP might be the ideal choice for those who have fewer health concerns. With access to decision support features during the enrollment process, employees can compare costs and coverage levels to make a more informed choice when selecting a benefit plan for spending their defined contribution dollars.

Defined contribution benefit plans go hand-in-glove with private marketplaces. With more efficient use of an employer’s funds, the two in tandem offer both a greater degree of choice for employees as well as a more efficient administrative solution for companies. However, perhaps even more important for employers than reduced costs is the added certainty that defined contribution offers. Rather than be at the mercy of fluctuations in the healthcare market, companies can know with more certainty how much they will be paying out for employee and even retiree benefits over the course of the coming years.

Employers should do more to recognize both the benefits of defined contribution for themselves as well as their employees. Better communication with employees in regard to their own empowerment and the increased options from which they can choose should display defined contribution in a genuinely positive light. Increased financial certainty coupled with a more consumer-centric user experience may result in an attractive combination for executives when they consider shifting to defined contribution benefit plans.