Employers looking for more predictability in their costs, more equity in their contributions and perhaps even more flexibility for their employees are increasingly exploring the idea of Defined Contribution strategies for their employee benefit plans.
Defined Contribution (or DC) plans come in various different forms. When I started my career many years ago, DC plans were often called “Full Flexible” or “Cafeteria” Benefit Plans. Today, they might be as simple as a set dollar amount contribution towards the purchase of several medical plan options or as complicated as a “benefits bank” utilizing an online platform from which employees can spend those dollars on the benefits that are most important to them (like a throwback to the Full Flexible Benefit Plan days!).
The predictability comes in when an employer can determine their costs right from the start. For example, rather than an employer paying 80% of the premium, regardless of which medical plan an employee chooses, the employer may instead set a specific dollar amount they’re willing to pay. An employee can then choose to buy up or down from that dollar amount for the plan that best fits them. Why should an employer pay more just because an employee chooses a more expensive plan? From an equity standpoint, why should one employee receive a higher employer subsidy (i.e. pay) simply because they chose a more expensive benefit? The employer also gets to determine the level of increase each year to their contribution, rather than being tied to the benefit renewal increase.
There can also be greater flexibility for employees if the plans and contributions are well designed. For example, public employers in Michigan are required to either share medical plan premium costs with employees through a 80%/20% split or they must utilize the “Hard Cap” (a state mandated maximum for employee only, dual, and family coverage). This “Hard Cap” is one form of a Defined Contribution strategy. Many public employers who utilize the Hard Cap oftentimes have plan options that cost the employee more than the Hard Cap. In this case, the employee pays the difference. Additionally, plan options like HDHP/Health Savings Account (HSA) plans tend to cost less than the Hard Cap. In these scenarios where the premium cost is less than the Hard Cap, employees pay nothing out of their paycheck for premium contributions AND employers may fund contributions into an employee’s HSA on their behalf – up to that Hard Cap or Defined Contribution limit. This gives employees much more flexibility and financial incentive to choose the most appropriate plan for them.
This is a very abbreviated explanation of a Defined Contribution strategy. To determine what kind of strategy is right for your organization and employees, talk to your Rose Street Advisors Relationship Manager!
Ben Cohen, CEBS, is one of our large group Employee Benefits Relationship Managers. Following graduation from Central Michigan University (Fire Up Chips!) with a degree in Human Resources, Ben began his career in 1997 as a benefits consultant with Kushner & Company. After 18 years in that role Ben joined Rose Street Advisors in 2014. Ben’s daily focus is working with clients to offer benefit options that help recruit and retain a productive workforce in a compliant and cost-effective manner designed specifically for each employer. He also enjoys educating employees about their benefits in a fun and informative manner.
Outside of work, Ben is passionate about community involvement and volunteering. He currently donates his time as a board member with the Portage Community Center, volunteers with Hospice Care of Southwest Michigan, and participates with volunteer opportunities through Rose Street Advisors’ SWEET committee. In the past, his involvement has included the American Red Cross, United Way, Volunteer Kalamazoo, Optimist Club, Jaycees, KHRMA, and the Michigan Maritime Museum. Ben loves spending time at home and at their cottage in South Haven with his wife, Jen, and their dogs. He loves travel, cars, golf, sailing, and recently started a group with friends rowing vintage wood shells (42 N’ Rowing).