What is a defined contribution health plan?

Posted by Alden Hui on February 19, 2021
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There are many types of defined contribution plans. However, one form of defined contribution plan that is often overlooked is for healthcare. In defined contribution health plans, a set amount is chosen and funded by the employer each year, allowing the employee to make claims and get reimbursed using these funds. Due to the clear cost advantages, employers are shifting away from traditional insurance to defined contribution plans. 


 

How do Defined Contribution Health Plans work?

Simply put, defined contribution health plans allow an employer to designate a set dollar amount to their employees. The reason that defined contribution health plans are particularly useful is because they provide a measurable budget for the employer. In traditional insurance plans (defined benefit health plans), the employer will face a rising premium on top of restrictions, co-pay, and limits.

A defined contribution health plan is similar to an administrative services only or self-funded plan. In all of these plans, a third party or in house representative will process the claims and the company or employer will reimburse directly to the employee without using coverage from an insurance company.

The switch to a defined contribution is easy once an employer understands how much goes into a traditionally insured plan. Instead of paying those premiums for coverage, allocate that amount into a budget for the employees. In this way, the money goes directly to the employee.

In fact, there really is no reason to use a fully insured plan for health benefits in Canada since most costs are covered by the provincial plans. The costs that escape the provincial net are typically expected, routine costs. For more information on why you don't need insurance for these types of dental and vision expenses, read our article on do I need private health insurance in Canada?

 

Why defined contribution beats traditional health insurance 

In a defined contribution plan, the employer budget goes farther because the money goes directly to the employee. Unlike traditional insurance, a defined contribution is set, therefore allowing the employer to better manage their costs. At the end of the day, the employee can still make the choice on where and how to spend their allocated funds. 

In Canada, the provincial health plans cover most medical expenses. Therefore, these plans cover beyond that scope, for expenses like vision, dental, paramedical and more. Private health insurance premiums are also eligible.

 

Four advantages of a defined contribution health plan:

  1. Cost efficient: the employer can predict and budget health benefit cost in each year
  2. Easy to understand: there are no complex policies or rules. The list of eligible expenses is typically clearly defined
  3. No time or effort wasted: whether administration is done in house or through a third party, this setup is easy and convenient
  4. Employee choice: your workers can choose how and where to spend their set dollar amount for healthcare expenses

 

Health Spending Accounts are a tax-free Defined Contribution Health Plan

Health spending accounts are available in Canada for incorporated businesses. When using a health spending account, the employer contributions are a business expense and reimbursements to the employer are tax free. For this reason, they are a popular choice for small businesses in Canada.

This type of tax free defined contribution health plan is easy to set up and claim online. It allows the employer to designate limits, create employee classifications, and fund the plan... all in one platform. Employees can make claims on the platform and get reimbursed tax free. To learn more about Olympia Benefit's HSA, visit our Employee Benefits section.

 

Download the Beginners Guide to Health Spending Accounts to see why 56,000+ businesses use an HSA:

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Related Reading:

What's inside an Employee Benefits Package for Small Business?

 

Topics: employee benefits