Defined Contribution

DEFINED
​
CONTRIBUTION

By: Tom Newby
Employee Benefits Director

The common denominator is presenting the benefit as a set dollar amount.

​In the 1980’s, the Defined Contribution 401(k) first appeared. Since that time, we have seen it evolve to other retirement programs such as Length of Service Awards Program (LOSAP), 403(b) and 457’s. In today’s ever-changing Employee Benefits World, the Defined Contribution has become an increasingly popular way for employers to provide a range of benefits to a group of employees that are very diverse in their needs and wants. 

Defined Contribution Employee Benefit Programs can take on many forms but the common denominator in all programs is that the employer chooses fixed dollar amounts that they want to contribute on behalf of the employee. In a Defined Contribution Employee Benefit Program, the employer takes themselves out of the role of deciding which single plan will have the greatest appeal to their employees. With traditional employer-

​provided health care, you are building your benefit around certain plans; with a Defined Contribution approach, you’re building it around a set dollar amount.

Basically, an employer will select up to 6 medical plans, a couple dental, vision, life and additional insurance options. The employer will also choose a fixed dollar amount for each of the following election categories: Employee Only, Employee & Spouse, Employee & Child(ren) and Employee & Family. The employee will then make their selection of insurance plans from those offered. They will then subtract the premium amount the employer contributes from the total premium of the plans they have elected. The balance of premium is then deducted from their payroll on a pre or post tax basis depending on the type of insurance using a Section 125/Cafeteria Plan.

Why is the Defined Contribution Employee Benefits Program gaining in popularity? Each employer will have their own reasons for choosing this method, but the list below are the most common reasons.

1. ​Employers can more easily budget when they have a fixed cost versus a variable cost that is determined only after a person enrolls.

2. ​Employers are removed from making decisions for their employees about what plan design is best.

3. ​Employees become engaged in the decision-making process. They and their families are able to select plans that fit their individual needs and budgets.