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Traditional group plans are commonly referred to as Defined Benefit plans. In this model, employees are presented with pre-selected coverage plans, chosen by the employer. Annual costs associated with defined benefit plans are uncertain for employers due to rising premium costs and claims.
Coverage plans are determined and set by employer
Employees have limited choice on their coverage
Employer costs are unpredictable
In a defined contribution model, employers can select a determined amount of pre-tax allowance to provide employees to spend on healthcare. Employers utilize this plan type to reimburse employees for their own health insurance policy premiums or out-of-pocket medical expenses, such as prescription drug coverage and doctor visits.
Fixed, pre-tax dollar amount to spend towards health coverage
Employees have a choice on how to spend the contribution
Dollars can accrue over time to plan for higher expenses, i.e. surgery, procedures, etc
No longer have to administer health benefits
Potentially see gains from employees (young, healthy, etc.) that don’t utilize the full contribution
No longer forced to increase contributions with the rising costs of healthcare
Provide additional compensation in a tax advantaged way (i.e., provide pre-tax HRA benefits instead of a post-tax salary increase)
Ability to offer some benefits previously not available due to affordability, minimum participation requirements, etc.