Defined Benefit Plan
Defined Contribution Plan

Understanding these two main types of employee benefit plans will help your company choose a program best suited to your needs.

As each approach has both positive and negative features, we have been careful to point out all of the factors that you should consider in the long-term management of a successful employee benefits program.

Defined Benefit Plan
Click here to customize your Defined Benefit Plan.
Defined Contribution plan
Click here to customize your Defined Contribution Plan
Compare Plans
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Defined Benefit Plan
  • Most common type of plan
  • The “design” or “schedule” of benefits is defined
  • Choose from Sun Life, Manulife, Empire Life, and more, or self-insure

Defined benefit plans are the most common type of employee benefit plans. With these plans, the “design” or “schedule” of benefits is outlined in the contract and in the employee booklet, and the insurance company gives you a set premium for (typically) 12 months. Traditional Canadian insurers such as Empire Life, Desjardins, Manulife, Sun Life and Great West Life provide defined benefit plans. As an alternative, many companies self-insure (ASO), using a third party administrator (TPA) and an independent claims adjudicator. We can help you assess the options to choose the right plan according to your company’s needs.

Pros of Defined Benefit plans

  • Everyone gets the amount of benefit they need
  • The insurer assumes short-term risk and will fund as much as needed

With a Defined Benefit Plan, 80% of claims will be made by 20% of your employees. It’s the familiar Pareto principle applied to health insurance, and it is consistent with our experience. What this means is that the majority of dollars spent on the plan are going to come from a minority of the members. Rather than consider this as a negative factor, however, the real-life translation is that those that need it most, have the healthcare support they need.

Canadian group insurance providers of defined benefit plans understand the typical claims pattern, and price their plans according to industry averages.

Cons of Defined Benefit plans

  • Future cost of the plan is unknown
  • Defined benefits must be limited to prevent over-usage

If you are like most small business managers, you recognize the importance of having a benefits plan, but want to have some degree of cost certainty. The unknown factor with most plans is not what it costs today, but what it will cost at each successive annual renewal.

With defined benefit plans, the future cost of the plan is unknown, as the insurer will add up the dollars claimed under the “defined benefit” and set the next year’s premium accordingly. With a defined benefit plan, you know what the plan will cover (the maximums in each category) but you cannot know what it will cost you if your employees claim heavily. There is no future cost certainty.

Without future cost certainty, a benefits plan can quickly run out of control in cost. It is not uncommon to see 30% increases year-after-year with some programs. When any area of company expenses sees double digit annual increases, it might be time to think about cost containment options.

Cost containment options almost always involve having the employees pay for more and more of their healthcare costs out-of-pocket. Expressed in different ways, it is an attempt to limit the cost of the plan, but sometimes it can be an uphill battle as healthcare needs persist.

Pharmaceutical inflation, combined with the introduction of new drugs for previously untreated conditions (such as mood disorders), exerts constant upward pressure on premiums. Programs with unlimited prescription drug coverage will continue to put increasing economic burden on Canadian employers.

If your company chooses a defined benefit plan, the careful management of the plan will help contain costs. Moving to a new insurer will not resolve the inherent causes of rising claims, because all insurers use a virtually identical formula for future premium adjustments.

Click Here to customize your Defined Benefit Plan.

Defined Contribution Plan
  • Health care spending accounts (HCSAs) have defined monthly funding
  • Employees spend their dollars as needed, unused dollars roll forward one year
  • Single, couple, family funding levels or by occupation class (e.g. management)

A defined contribution benefits plan is an excellent solution to the rising claim costs often associated with defined benefit plans. As the name implies, the cost of the plan is certain, or defined. This is achieved through the introduction of health care spending accounts (HCSAs) with set annual funding - and therefore set spending limits. Set HCSA funding according to single, couple, family levels, or determine funding by years of service, percentage of income, or occupation class.

Pros of Defined Contribution plans

  • Cost certainty - today and tomorrow
  • Virtually any health-related claim is eligible
  • Unused dollars are refunded to the employer

Knowing what your benefit plan will cost year after year allows for realistic budgeting, instead of being surprised by annual increases. Defined contribution plans like HCSAs guarantee that your program stays on budget, year after year. Increase or decrease funding at each annual renewal according to need and affordability.

What is covered? Since your contribution is defined, there is no need to strictly define what the plan pays for. As a matter of fact, the list of eligible claims is wide-ranging, making it difficult for an employee not to find value. Everything from massage therapy, vision care, prescription drugs, dental including major dental, orthodontics, and prescribed vitamins and herbs (properly prescribed and dispensed by a naturopathic doctor.)

Cons of Defined Contribution plans

  • When dollars run out, claims are rejected
  • No electronic claim submission - manual paper claims
  • Can be an adjustment for employees accustomed to a traditional plan

If employees have been used to the typical defined benefit plans, they may have some trouble adjusting to the more frugal limits of an HCSA. Although few members ever use the high maximums available in a defined contribution plan, they nonetheless feel comforted by the fact that should their needs change, the plan will provide.

Because funding is limited, claims must be submitted manually via paper claim.

Click Here to customize your Defined Contribution Plan.