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HR Magazine, December 2002 - Employee Communication: How Defined Contribution Health Plans Work

By Kathryn Tyler   12/1/2002
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HR Magazine, December 2002

Vol. 47, No. 12

Meet Your New Health Plan Option

How Defined Contribution Health Plans Work

Defined contribution plans, also called consumer-driven plans, are designed to make employees become more knowledgeable about health care choices and costs, and thereby become more judicious in their spending. The biggest boost for such plans came last June when the Internal Revenue Service said the unspent amount in an employee’s health reimbursement account (HRA) could be carried over from one year to the next.

Although defined contribution plans vary in detail, all give each participating employee an employer-funded HRA that the employee can draw upon tax-free for health expenses. After the fixed amount in the HRA has been spent, the employee is responsible for the rest of his or her health expenditures.

Plans that provide only this basic-level service are called “pure” defined contribution plans. But most employers do more. Typically they set a cap for the employee’s own outlays and provide traditional health coverage for expenses that exceed the cap. Employees generally are offered a network of health providers offering discounted fees.

The amount that goes into the HRA for each employee is set by the company, and it can be as much as, say, $5,000 for a family; the employee has wide latitude in deciding how to spend it.

The second tier of a typical defined contribution plan, the level at which the employee spends his or her own money—usually a maximum of $1,000 to $3,000—is often called the bridge. It leads to the third tier, traditional catastrophic health care coverage, typically with a 20 percent co-payment.

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