NU Online News Service, Dec. 3, 4:30 p.m. – Conning & Company, Hartford, says momentum seems to be building for a shift toward defined contribution health plans.

The defined contribution approach is poised to spread because it appears to cap costs for plan sponsors, reduce sponsor exposure to liability lawsuits, and give employees more choice, Conning analysts write in “Defined Contribution Approaches to Health Care Benefits,” a new report on the DC plan market.

When an employer sets up a defined contribution health plan, the employer contributes a fixed amount of money for each employee, and the employer and employee contributions are both excluded from taxable income, Conning says.

Some programs now on the market combine fixed benefits contributions with access to traditional, high-deductible group insurance coverage.

But Conning predicts the typical program will cut the red tape insurers face when they sell traditional group coverage by requiring employees to buy health benefits through the individual market.

A number of 401(k) plans have performed poorly over the past three years, but Conning says developers of defined contribution health care benefits programs are still trying to emulate the progression in the pension world to 401(k) plans, from traditional defined benefit pension plans.

Rather than promising a fixed, defined income at retirement age, the sponsor of a 401(k) plan simply makes regular contributions to an employee-directed fund, and leaves the investment options and performance up to the employee.

Similarly, sponsors of defined contribution health plans contribute a fixed amount of money, but avoid dictating how that money must be spent, Conning says.