With the cost of traditional healthcare plans on the rise, HR leaders and benefits buyers are re-evaluating their employee health benefit options, with many employers moving to defined contribution plans. Like any benefit change, moving to a new plan can be daunting, but with proper research and communication the transition can be made with little difficulty and can benefit both employers and employees.
The two types of plans for employee health benefits
Employer-provided, group health care plans are familiar to both employers and employees. They involve the company choosing a single health plan to meet the needs of their workforce, with the employer paying a percentage of the premium cost. While these traditional plans are simple to understand and can be beneficial for very large businesses (risk is spread across many employees, reducing premiums), they involve a lot of research by benefits buyers to choose a plan, and the “one-size-fits-all” approach limits employee choice. In addition, since premiums rise based on the healthcare cost of the entire staff, employees with fewer healthcare needs still pay the bill for the claims costs of their high-claims colleagues.
Defined contribution plans offset costs while maintaining benefits and increasing employee options. Employers give each employee a set dollar amount (a “virtual gift card”) to help cover the costs of monthly premiums, and the employee can choose the coverage plan they want, paying the remainder. The benefits of a defined contribution plan are total cost predictability for employers (as they pay a fixed dollar amount, not a percentage of premium costs), an average cost savings of 20% over employer-provided plans, and increased plan options and savings for employees (via tax credits and employer-provided defined contributions, which can help small-business employees cover up to 100% of their premiums).
There are some learning curves and administrative hurdles to be considered when changing to a defined contribution plan model. First, these plans require significant upfront involvement by employees, who are responsible for researching and choosing the plan that works best for them. Employees are also responsible for paying their healthcare costs upfront before being reimbursed by their employer, which may be confusing for employees accustomed to employer-provided plans. In addition, since a defined contribution plan is a payroll function, it will require additional training and administrative resources.
Important things to remember when making the transition to a defined contribution plan:
- Communication and transparency are absolutely critical in preparing both your employees and administrative staff for the change. Open discussion about the new health plan should start as far out as possible to address all concerns. Recommended communications methods include print, email and online materials, as well as group meetings and webinars for remote employees. Your company’s goal should be complete transparency, showing the financial contributions the company is making to employee health care, as well as the impact on employees’ costs. Whenever possible, share your cost analysis reports with employees.
- The response to the change will differ based on demographics (younger, single employees may embrace the new plan faster than older employees or those who are married/have families), so position your communications and training accordingly.
- Finding the right vendors for your organization is crucial. Some offer technology such as online portals for ease of employee access, while others will handle all or most administrative and employee communications needs, a huge benefit for smaller companies with lower administrative staff resources.
If increased costs and changing employee healthcare needs are an issue at your company, it’s probably the right time to take a look at your employee health benefits plan. Remember--there is no single health insurance solution that works for every company, but thorough research and open communication with your company leadership and employees can help you to find the right plan for your organization.