A Solution to the Small Business Health Insurance Conundrum


It’s a common conundrum—how do we offer health benefits without breaking the bank? In fact, this is such a common small business challenge that only 54% of small and midsized employers (with fewer than 200 employees) even offer traditional health insurance coverage today.

As small businesses strategize how to afford health benefits, an increasingly popular approach is defined contribution.

What is Defined Contribution?

With a defined contribution health plan, the business gives employees an allowance to use on individual health insurance, instead of contributing to a group health insurance policy. In other words, the business sets up a formal health plan to help employees with individual health insurance.

Defined contribution is taking off with small businesses because it offers an affordable health benefits model where the business, not the insurance company, controls the cost. Additionally, it is a formal, tax-free health benefits program that gives employees access to quality health insurance.

New Rules for Reimbursing Employees’ Individual Health Insurance

But, is this solution too good to be true? If you have been following federal health reform (aka Obamacare), you have probably heard there are new rules and restrictions for reimbursing employees’ individual health insurance. This is true. Employers using a non-compliant group health plan, including reimbursement arrangements, are subject to costly fees.

But the new rules do not mean defined contribution health plans are off the table. What the new rules mean is the health plan needs to be set up and administered in a compliant way.

4 Tips Before Diving In

As a business evaluates a defined contribution and individual health insurance program, here are four tips.

Tip #1: Decide Taxable or Tax-Free Contribution
One of the first decisions a business makes is how to structure the plan. There are two main options—a taxable health insurance stipend or a tax-free health reimbursement plan. Because of the obvious tax savings, most small businesses use a tax-free health reimbursement plan.

Tip #2: Understand the Rules and Reforms
Given the myriad of new and existing rules for employer-sponsored health benefits, understand the business’s obligations under ERISA, IRS, HIPAA, COBRA, and PPACA. Failure to comply can mean costly fees.

Tip #3: Use an Online Self-Service Software
Learning compliance and administration can seem daunting. The third tip is to use an online self-service software to automate compliance and simplify administration.

Tip #4: Don’t Skip Employee Education
We’re all short on time, but remember, educating employees helps everyone get the most out of the health benefit. Educate employees about the defined contribution health plan and about how to access individual health insurance.


Defined contribution and individual health insurance offer a solution to the health insurance conundrum. But before a business dives in, follow these four tips to save time, money, and headaches along the way. For more information on defined contribution health plans, check out Zane Benefits’ complimentary eBook.

Christina Merhar is a guest author and Senior Editor for Zane Benefits, the leader in individual health insurance reimbursement for small businesses. Christina has a passion for helping small employers understand the ins and outs health benefits and Human Resources.

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Brooke Billingsley

Vice President
Perception Strategies

Synnovatia is a strategic coaching firm that is detailed and knowledgeable about business. i have a small business that grew from $150K to $750K because of the goal setting and resources that Synnovatia provided. It saves me years of learning on my own.

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