A defined contribution health plan works best for companies that want to offer health benefits, but cannot offer group health insurance due to high cost or participation requirements. A common question is we receive is "what is the cost of a defined contribution plan?"
Rather than paying the costs to provide a specific group health plan benefit (a "defined benefit"), employers can control their monthly costs by establishing a defined contribution health plan.
Defined contribution health plans are an affordable alternative to employer-sponsored group health insurance plans. Defined contribution health plans by themselves are not health insurance plans.
The general concept of a defined contribution health plan is that a company gives each employee a fixed dollar amount (a "defined contribution") that the employees choose how to spend. Employees then use their defined contribution to reimburse themselves for individual health insurance costs.
The cost of a defined contribution plan is 100% up to the employer. In other words, if a company wants to contribute any amount to employees' health care costs, they can afford a defined contribution plan.
To calculate the cost of a defined contribution plan, follow three simple steps:
With defined contribution plans there are no minimum or maximum contribution amounts so the employer truly does define and control all costs of a defined contribution plan.