May 2025 Question of the Month
What is a Defined Contribution Benefits Plan?
Many people associate the words ‘defined contribution’ with retirement plans, but defined contribution plan design strategies have become increasingly more popular in the welfare benefits arena in the last 5-10 years.
The concept involves the employer identifying a fixed monthly benefits dollar allowance for all eligible employees. For example, $75/month, $100/month, $125/month, etc. Once the dollar amount is determined, the employer then decides what types of benefits they want to offer such as medical, dental, vision, life, disability, accident, and critical illness—to name a few. The employee is then able to spend the employer’s defined contribution allocation to purchase benefits on a cafeteria-style basis. If the employee elects more than the allocated dollar amount, any excess premium is paid by the employee through a payroll deduction cost arrangement.
What are the benefits to the employer and employee?
Establishes a uniform and fixed benefits budget for the employer
Employees benefit from ‘group benefits underwriting’ which can mean better rates and improved terms and conditions
Helps employers to affordably round-out a benefits package to help with recruitment and retention issues
Instead of a one-size-fits-all approach, employees can pick and choose the benefits that work best for their households
Customized solutions for varying classifications of employees – i.e. create a benefits package for part-time employees, establish distinction of available benefits between classification types
Payroll tax savings can be leveraged as many benefits can be purchased on a before-tax basis
The most effective defined contribution plan strategies are facilitated using benefits technology that empowers employees using decision-support tools. Think along the lines of an Amazon shopping cart experience! In addition to technology, benefits communication and education is always an important element in rolling out a new benefits opportunity.
You can ask your dedicated Capitol Benefits Group team for more information on this type of plan design strategy. We are happy and willing to conduct a benefits review to fully address any questions or feedback and determine if this opportunity is a good fit for you.