By Joseph A. Bucci Jr., GBAC Inc.
EDITOR’S NOTE: The following article is adapted from the Connecticut Energy Marketers Association CEMA Pipeline newsletter with the permission of the Association and GBAC.
The concept of Defined Contribution (“DC”) has been utilized for years in cafeteria and 401(k)/retirement offerings. Defined Contribution or DC is a dynamic change to the manner in which employee benefits, specifically health insurance, will be offered as a result of the Affordable Care Act.
Defined Contribution can be best explained as follows: The employer provides a fixed dollar amount to their employees to spend on their health insurance and related employee benefits as they see fit, without the employer making the decision for them. This method provides the employee with the flexibility they need to pick plans that match their budget and lifestyle. In return, the employer has flexibility in how they design the plan offering with full control of the cost. Defined contribution instills consumerism amongst employees and provides access to benefits that employees value.
In a traditional employer-provided benefit setting, the group medical offering is built around what best fits the employer based on a process of selecting a plan or two and offering it on an employer-employee cost share (for example: 80% employer/20% employee), and the employee can choose to elect or waive those plans offered. The rising cost of health care has caused employers of all sizes to re-evaluate how much they pay for insuring their employees.
Defined Contribution plans provide employers with a solution to the cost concerns of traditional group health insurance because it allows the employer to define and control the costs associated with offering health insurance and related employee benefits. By transitioning the traditional employer-employee cost share to a quantifiable [defined] contribution for an employee to utilize towards the purchase of health insurance and other related employee benefits, the employer continues to offer a competitive benefit while affording the employee to have more consumer choice.
With a Defined Contribution approach, the menu can be simple… or it can be a vast, with many plan options. If an employer currently offers plans with Health Saving Accounts (HSAs), Health Reimbursement Arrangements (HRAs) or Flexible Spending Accounts (FSAs) these plans can continue to be offered.
If an employer is currently contributing 80 percent to employee premiums regardless of class of coverage, they can assess if that contribution is still acceptable and then budget it for the current plan year ahead. Then as each renewal approaches and premiums increase, the employer will continue to assess the relevance of the defined contribution and the benefit offerings for employees to choose from. Employers can elect to maintain or adjust their defined contribution based on the dollar amount that they established in the first year. This way they always have the option of increasing the contribution to the employee premium instead of decreasing the employer percentage and increasing the employee percentage.
Recent data from employees using a defined contribution through a private benefits marketplace shows how more choice and personalization through a marketplace results in many employees selecting benefit packages that are better aligned with their healthcare needs, risk tolerance, and financial flexibility. The number of employers considering offering a private benefits marketplace for employees has tripled in the past year to 56%.