Let’s answer the question “What is a defined contribution plan?” without the jargon, corporate speak, and compliance terminology. By the end of this 5-minute read, you’ll be able to speak fluent ICHRA and break down what a defined contribution health plan looks like in the real world.
HealthCare.gov describes ICHRA plans as follows:
You get the idea. But what does that actually mean?
What is an ICHRA?
Put simply, it’s a health benefit provided by employers.
With a little more essential detail, it’s a health benefit, paid for by employers, that gives employees money to cover the cost of their health insurance premiums.
How does a defined contribution plan work?
1. Employers set and share the amount they’re providing for insurance premiums.
Those funds are tax-deductible for the employer and tax-free for the employee. Where traditional plans are subject to yearly increases, defined contribution plans are predictable. A set contribution amount makes it easy for employers to predict costs.
2. Employees pick an insurance plan from the individual marketplace.
Unlike traditional plans, where a single plan is chosen for everyone, employees can choose a plan and provider that fits their needs. That means that employees in different states can pick the plans that fit their needs geographically, that families can choose the plan that ensures their pediatricians are in-network, and that all employees can select coverage based on their health needs.
3. Leveraging an administrator makes it simple and private.
Having an employee submit receipts directly to the employer for review is complex and raises significant privacy concerns. (Psst: With the right technology, reimbursements are non-existent. See “Reimbursements” below.)
4. Agents can take on a true advisor role.
Brokers work with their clients to determine the best defined contribution strategy for their businesses and their employees’ needs.
The essential terms: 10 key terms to help you answer the question “What is a defined contribution plan?”
1. Individual Coverage Health Reimbursement Arrangement (ICHRA)
You’ve got this one, right? An ICHRA is an employer-funded health plan that allows companies to put money toward employees’ individual health insurance premiums.
2. Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
Think of this like an ICHRA plan’s little sister (Q-Sarah). This is the same employer-sponsored health benefit, except it is designed for small businesses with fewer than 50 employees. QSEHRA plans are defined contribution plans, too. Employers provide tax-free funds to put toward employee health insurance premiums.
3. Defined contribution
The set monthly dollar amount provided by employers for employees to buy individual coverage.
4. Qualified medical expenses
Insurance premiums and other out-of-pocket costs like co-pays or deductibles as defined by the IRS.
5. Employee classes
With defined contribution plans, businesses aren’t locked into offering the same benefit to all employees. Employers can adjust contributions for each employee class. With ICHRAs, employers offer a defined contribution for up to 11 different employee classes, including:
- Full-time employees
- Part-time employees
- Seasonal employees
- Salaried employees
- Non-salaried employees (such as hourly)
- Temporary employees of staffing firms
6. Individual health insurance or market plan
Individual health insurance is non-group health coverage for one person or a family. They are Affordable Care Act (ACA) compliant health insurance plans. They can be on-exchange — plans you purchase through the Health Insurance Marketplace; or they can be off-exchange — plans you buy directly from an insurance company or broker.7. Tax-free (for defined contribution plans)
ICHRA funds are not considered taxable income for employees. And they are tax-deductible for employers.
8. Applicable Large Employers (ALEs)
Employers with 50 or more full-time equivalent employees. The ACA’s employer mandate requires ALEs to offer “affordable” health coverage to full-time employees and dependent children. Defined contribution health plans, offered through ICHRAs, could offer your clients a way to provide comprehensive and “affordable” health coverage.
9. Participation requirements
Traditional health plans often require a minimum number of employees to enroll in order to expand the risk pool, therefore controlling costs. Defined contribution plans shift risk and remove minimum requirements all together. For businesses that struggle to meet participation minimums, defined contribution plans allow employers to offer health benefits.
10. Reimbursement
ICHRA stands for Individual Coverage Health Reimbursement Arrangement. Defined contribution plans allow employers to reimburse employees for insurance premiums — but Nexben makes it simpler.With Nexben, employees don’t have to front their insurance premiums and wait for reimbursement. Nexben’s payment solution facilitates secure, compliant premium payments and payroll deductions when employees choose a plan that costs more than the employer contribution.
That’s it. Defined contribution health plans help employers control costs, employees access the benefits they want and where they need, and administration can be simple. The sooner you feel confident about it, the sooner you can start building your business with it.
Connect with us to discover how partnering with Nexben can help you deliver smarter, more cost-effective solutions.