What is a defined contribution strategy?


It’s no secret that costs are rising for employers to offer their employees health insurance. What can an employer do to stabilize costs and still give employees options? A defined contribution approach in the context of an employer premium strategy can help establish a fixed cost for offering health insurance.

Choose Your Number

When an employer adopts a defined contribution model, they decide how much money they will allocate towards employees for premium contribution. Whereas an employer may decide to cover 75% of an employee’s premium and see that number rise every year, in a defined contribution strategy an employer may decide that they will cover $400 of an employee’s premium, regardless of what plan they choose. This allows employers to have a better grasp on an annual basis of their maximum spend for employee’s health insurance, as it creates a simple formula:

Typically, an employer will offer multiple medical plan options to choose from and allow employees to choose from a “Base Plan”, a “Buy Up” plan, or a “Buy Down” plan. The Base Plan is usually the plan where the defined contribution is equal to or covers most of the employee-only premium. The Buy Up plan is usually richer in benefit design, and since it is more expensive it is the employee’s responsibility to pay the difference. The Buy-Down plan is usually a high deductible health plan and the employee-only premium is less than the defined contribution amount. This creates an opportunity for an employer to contribute some funds to an employee’s HSA bank account to incentivize employees to choose a lower-cost plan. For example:

Consideration for Employers

As with anything benefits related, there are some key things to consider before an employer adopts a defined contribution strategy:

  • Do you have an electronic enrollment platform that can support this model, or will this create an administrative burden for accounting and HR?
  • Does your current rate structure support this mode? If rates are based on age this model is not feasible due to age discrimination.
  • Is your company prepared to regularly assess the contribution amount to ensure it is staying competitive against the benchmark?
  • Is your company diverse enough medical plans to meet the needs of a multi-generational workforce?
  • Is the company prepared to offer a defined contribution amount for dependents as well?

If you have any questions or are interested in implementing a defined contribution strategy, please don’t hesitate to reach out to Advanced Benefits and we’d be happy to assist!


Author: Arwyn Robinson – SHRM CP


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