Adam Stevenson |
Tl;dr: "Defined contribution" means providing employees with a benefit of a specific dollar amount. You're probably most familiar with defined contributions in the context of the 401k: your employer provides a fixed amount each month to be contributed to a retirement account. In employee health benefits, defined contributions can simplify the healthcare expenses of your business significantly. The best part? With options like ICHRA, you can make the contributions tax-advantaged.
But what if you could just give your employees a set amount of money and let them decide how to spend it on healthcare? That's what defined contributions are all about!
In the simplest terms, a defined contribution is a fixed sum of money that an employer offers to their employees for healthcare costs. It’s like giving your employees a healthcare allowance. They can use this money to purchase individual health insurance policies or pay for other medical expenses. No strings attached. (Almost — more on that below!)
Defined contributions can be made tax-advantaged through an ICHRA. This essentially means that the money you contribute isn't subject to payroll taxes. Employees also aren't hit with income taxes for the money they spend from the ICHRA, as long as it’s on qualified healthcare expenses. A double win!
Note: Tax rules can be intricate. Always consult a tax advisor to ensure you’re staying within the bounds of the law.
You might be thinking, "This sounds too good to be true; what's the catch?" There are legal constraints to consider. ICHRAs must comply with various federal laws including nondiscrimination requirements. This means you can't favor highly compensated employees over others. Again, always good to have a chat with your legal advisor before diving in.
Consult a Pro: Before setting up an ICHRA, consult your tax advisor and legal counsel to make sure you're complying with all federal and state laws.
Budgeting: Determine the allowance you can offer. Unlike group plans, this is a fixed cost so you can budget more efficiently.
Employee Input: While optional, it's a good idea to ask your employees what kind of health coverage they’re looking for. Tailor the contribution classes based on this information if you want.
Implementation: Use a reliable third-party administrator to set up and manage the ICHRA. They can help with the nitty-gritty like documenting healthcare expenses and ensuring compliance.
When it comes to health benefits, there’s no one-size-fits-all answer. Defined contributions through an ICHRA offer a viable alternative to traditional group health plans, especially for startups and smbs. You get tax advantages, your employees get flexibility, and everyone stays on the right side of the law.
Thatch makes it easy to provide a defined contribution for healthcare. We'll set up an ICHRA and manage it for you in just a few minutes.Schedule demo