When choosing a benefits package, small-to-midsize business owners typically choose between a traditional defined-benefit plan or a defined-contribution plan. As a decision maker for a business with 50–99 employees, you should know the ins and outs of both plan types as you consider options for your company.
Differences Between Benefit Types
The defined-benefit package is the traditional employer-sponsored health plan. As the employer, you’ll choose a group plan and pay a percentage of your employees’ premiums every month. You can choose a plan directly from a health insurance company or through the federal or state based, public marketplace exchange. All employees have the same premium, the same deductible and the same benefits.
There are two types of defined-benefit plans. In a fully funded plan, the insurance company covers unexpected claims, and employers and employees share the cost of premiums. In a self-funded, defined-benefits plan, the employer covers employees’ out-of-pocket claims. Employers have more freedom to tailor the health plan for employee needs, but there’s also a risk because costs vary each month.
The defined-contribution plan allows an employer to better predict or “fix” costs. You give your employees a set amount to spend each month, and your employees can choose the plan that best meets their needs. If the plan they choose is more expensive than the amount alloted, the employee pays the difference in premium. Businesses with 50+ employees may even choose to work through private exchanges. These exchanges let you stipulate from which plans your employees can choose, then the employee can go out to a virtual health marketplace and shop from those plans to select the benefit package that best meets their unique needs. It’s important to note that recent guidance from the IRS, issued in May, indicates that certain types of defined-contribution plans will not satisfy the requirements for minimum essential coverage set out by the ACA, but some insurers and business owners feel that the guidance is unclear and may change. Another advantage some employers find with defined contribution plans is that their employees may become cost-conscious. In a defined-benefit plan, you typically select a plan that balances coverage needs with affordability. With a defined-contribution plan, more decision making is in the hands of the employee. When employees select their own plans, they have the opportunity to choose the plan that best fits their lives. The risk is that employees will choose a plan based on cost that doesn’t meet actual needs, causing them to incur large medical bills or delay necessary care making them less healthy over the long term.
The defined-benefit plan still reigns as the traditional, popular plan for businesses, but the defined-contribution plan is slowly gaining ground. If your business is looking to save money related to your offered benefits package, you should compare the costs and benefits of these two plans, talk to a health care broker and decide which one works best for you.
Stephanie Dwilson has extensive experience providing expertise on topics including health, law and marketing. She’s a science journalist published by Fox News, a marketing expert and an attorney with expertise in personal injury law. She’s also a small business expert featured by Businessweek and Millionaire Blueprints magazine. She’s also worked as a marketing consultant for ministries and a PR lead for one of the largest churches in America.