Defined Contribution Health Care

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Recruiting and retaining key employees is important to every company, and a company's health benefit program is a key part of the compensation they offer to their employees. However, the high cost of traditional group benefits has made them untenable for many employers, and the predictability of defined contribution health plans are making them an increasingly attractive option.

The defined contribution model redefines the role of group health coverage. It is no longer an open-ended benefit with costs that can rise at an unsustainable rate. Instead, it becomes a predictable, focused investment for the business. Employers set a budget for health care and employees can choose whether that amount is enough for their particular needs.

How it works With a defined contribution health plan, a company allocates a fixed dollar amount (a "defined contribution") that each employee can use to purchase benefits through an online marketplace (sometimes called an ‘exchange’). Employees choose among the health and benefits options as determined by the employer. The exchange itself is not an insurer, but rather provides a menu of plan options offered by a private insurer.

In addition to offering greater cost control and predictability to employers, defined contribution plans allow employees to be more involved in their health care choices.

  • Within the online marketplace, employees provide information about their expected health use, their ability to handle costs, and their willingness to take risk.
  • Employees receive personalized recommendations based on their specific preferences.
  • If the employee chooses a plan or mix of benefits that cost more than the employer's contribution, the employee pays the difference through payroll deductions.

"Rather than paying the costs to provide a specific group health plan benefit, employers can fix their costs on a monthly basis by establishing a defined contribution health plan."

 

 

What is a Defined Contribution Plan?

Frequently Asked Questions

What is different about a defined contribution approach compared with traditional benefits?
As with traditional group benefits, the employer determines the types of coverage to offer and which specific plans to include in the options available to employees. The primary difference with a defined contribution approach is that rather than covering a different dollar amount depending on what plan or plans the employee chooses, the employer determines one fixed contribution amount for each employee class, and the employees then choose which types of coverage to select. With defined contribution, employees choose and enroll in their selected coverage, with guaranteed issue (just as with traditional group benefits), and make their contribution toward their benefits through a payroll deduction.

Is there a minimum or maximum employer contribution limit for defined contribution plans?
Yes. Although this minimum requirement varies by state and by carrier, employers generally must contribute a minimum of 50% of the employee-only rate for the lowest cost plan offered on the private exchange. AultCare will provide guidance on your specific situation.

Is there a minimum employee participation requirement for defined contribution plans?
Yes, this is governed by IRS rules and AultCare requirements of 75% participation.

Can a company or employer give employees different amounts with defined contribution plans?
Yes. With a defined contribution health plan, an employer can give employees different contributions based on classes of employees. Federal regulations require that “a plan or issuer may treat participants as two or more distinct groups of similarly situated individuals if the distinction between or among the groups of participants is based on a bona fide employment-based classification consistent with the employer's usual business practices.”

Do defined contribution plans control costs?
Early evidence suggests they do. The employer is in the driver’s seat and has great flexibility to set their contribution levels to a number they can afford. Benefits costs per employee are fully predictable, making it easy to budget. Defined contribution plans offer greater transparency of costs between the employee and the employer – it’s clear from the employer’s contribution exactly what the company is putting toward employee benefits. Employees have a greater appreciation for the financial commitment their employer is making, while they also have more control in selecting the benefits they prefer.

How many options can an employer offer?
The employer still determines which benefit options to make available to their employees. However, rather than having to just choose one or two plans for employees to select from, in a defined contribution model an employer can offer a broader range of choices. The wider range of choices allows employees to select the coverage that best meet their own needs and preferences.

Is this too complicated for employees to understand?
Most employees enjoy the greater flexibility and broader set of options available to them with a defined contribution program. The decision support tools available on the shopping exchange guide the employee through the selection process and the plan recommendations based on their own preferences and budget. Just as 401k plans gave employees more choice in their investments, so too do defined contribution plans allow employees to have more options and responsibility in managing their benefits and health costs.

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