Defined Contribution

The majority of employers offering group healthcare benefits do so through what is know as a defined benefit plan. In this model, the
   employer selects a specific health plan and makes it available to employees to enroll in. With this model, the employer tends to be more
   proactive than the employee in selecting and managing healthcare benefits. This design can be representative of a one size fits all model.

However, with the enactment of the Affordable Care Act (ACA) and the launch of both public and private insurance exchanges, employers
   now have an alternative option to shift some of the responsibility of choosing a healthcare plan to the employee through the use of
   a defined contribution model.

Under a defined contribution plan an employer sets a specific dollar amount aside for each employee and then the employee chooses from
   a variety of plans that the employer preselects. Which plan the employee ultimately selects is now based upon the employee's specific need.
   A younger, healthier employee may select a lower cost plan that has a higher deductible and more out of pocket in order to not pay for
   coverage they may not need. On the other hand, an employee who has ongoing medical expenses may select a plan with a lower deductible
   and less out of pocket in order to reduce their financial exposure but it will come at a higher premium.

With a defined contribution plan employers can better predict and plan for health benefit costs by choosing how much money to allocate to
employees. This is one way that employers can control their expenses in the face of relentlessly rising health care costs.

What to be Aware of (Regardless of Employer Size)

If an employer drops group coverage and instead offers employees $500 per month via an HRA to buy individual coverage either on or
   off an exchange, the employee would owe income tax on the amount they received and the employer could not deduct the contribution as
   an expense.

Under the Affordable Care Act, it is no longer acceptable for an employer to put money into an HRA and then have that money used by
   employees to pay for individual health insurance premiums. Should an employer, regardless of size, be audited and found to be in violation
   of market place reform the employer can be assessed a $100 per day per employee penalty. Over the course of a year, this penalty could be
   as much as $36,500 multiplied by the number of employees in violation. If an employer blatantly disregards this law, the penalty can be
   substantially higher.

On the other hand, premium contributions via an HRA for employer-sponsored group coverage are not taxed as income to the
   employee and are deductible to the employer. In this scenario, the employer still has a group plan but is giving employees a fixed dollar
   amount to choose from a variety of group sponsored plans.

The key here is whether or not the employer is giving money to the employee for a group plan which is sponsored by the employer or
an individual plan which is not sponsored by the employer.