How Defined Contribution Works
To illustrate how defined contribution works, here are some examples of funding options:
1. Lump Sum:
Take the total net cost spent on all employee benefits and divide by the number of eligible employees. For example, if the total net cost for all benefits (health, life, disability, etc.) is $250,000 for 25 eligible employees, each employee would receive a lump sum of $10,000 annually to spend toward any
combination of benefits.
2. Lump Sum with Split Funding:
Do the same calculation as #1, then split the funding between health and ancillary coverage. Using the example above, you could designate that each employee can spend up to 80% ($8,000) on health insurance and up to 20% ($2,000) on ancillary benefits.
3. Tiered Allocation:
This option varies the amount provided to employees based on their household status. For instance, an employer might provide a lump sum of $4,000 to single employees, $8,000 to employees with a two-person household and $12,000 for employees with families. The employee spends these amounts as desired toward any combination of benefits.
4. Tiered Allocation with Split Funding:
You provide a tiered allocation as indicated in #3, then split the funding between health and ancillary coverage. For example, a single employee could receive $4,000 for health insurance + $1,000 for ancillary benefits; a family might receive $8,000 for health insurance + $2,000 for ancillary benefits.