Traditionally, the small group employer (those with under 50 employees) has paid a percentage of the premium for the employee and possibly dependents. Depending on the nature of business and finances, this percentage could be as much as 100% for employees and dependents or as low as 50% for employee coverage only.
In the California small group market, rates vary according to age, product design, and zip code of residence and have been increasing every six months, making budgeting for employee benefits very difficult. Defined Contribution arrangements help to fix the employer's cost by allowing the employer to set a fixed dollar amount paid towards benefits for each employee.
Employers setting up a Defined Contribution arrangement agree to pay a fixed dollar amount towards health and/or dental insurance for each employee. The employee pays the balance of the premium (if applicable) through payroll deduction. This additional cost may be deducted through a POP Section 125 (see my article on these plans). If the plan the employee chooses is less than the amount paid by the employer, or if the employee is covered elsewhere and is not participating in the group insurance, the extra money is not reimbursed to the employee in wages or bonus!
The Defined Contribution arrangement works best for employers who have previously not offered group insurance or who are considering reducing benefits as a cost saving measure. As with all employee benefits, in order for the employer to take advantage of the premium tax deduction, the program must be in writing and communicated to the employees.
Please feel free to call me at 619-668-5200 x 201 with your questions.
Jean Strouf
