How Defined Contribution Health Reimbursement Account Plans Work

An employer pays a fixed amount towards health care coverage for each employee. This is the defined part of a defined contribution health care plan or Health Reimbursement Account. The employer then provides employees with multiple health care plans to choose from. The deductible, co-payment amount, plan style, premium, and coverage may vary widely between the numerous health insurance plans offered. It is up to the employee to decide which Health Reimbursement Account plan will best suit his or her needs, thus providing better results. 

The employer pays a portion of the premium directly to the health care provider, but, if the plan costs more than the employer's defined contribution, the employee must pay the difference. If it costs less, the employee sees the difference added to their paycheck. Employees may also elect not to have any coverage, and receive their defined contribution in the form of cash.

Alternatively, an employer may choose to provide an annual tax-free health fund. For the sake of discussion, let's say this amount is $1,500. The employee would be able to spend that money on any medical expenses or doctors that they choose. After this money is used, the employee may then have a high deductible of $1,500 that must be paid for further treatment. Once the employee has paid this, then company coverage will kick back in to cover the remaining payments. These types of Health Reimbursement Account defined contribution plans frequently include catastrophic coverage to guard against unforeseen emergencies.

As health care and drug costs continue to escalate, there is no easy solution to these issues. Unless major reforms to our current health care system takes place, employers will continue to seek solutions to the economic challenge of providing health insurance thru a Health Reimbursement Account