As the cost of insurance continues to rise, employers are looking at different ways to attract and retain good employees while curbing their costs. There are several ways this can be done through alternative benefits. The most common method is through self-funded plans. This article will give a brief summary of self-funding and its major terms.
What is Self-funding?
Under an insured health benefit plan, an insurance company assumes the financial and legal risk of loss in exchange for a fixed premium paid to the carrier by the employer. Employers with self-funded (or self-insured) plans retain the risk of paying for their employees’ health care themselves, either from a trust or directly from corporate funds.
Most employers with more than 200 employees self-insure some or all of their employee health benefits. Many employers with fewer than 200 employees also self-fund, but these employers require greater stop-loss insurance protection than larger employers. In the past as a general rule, employers with fewer than 100 employees fully insure their group medical benefits. As ACA costs continue to rise small employers are now reaching into the self-funded arena through small group self-funding, captives, and level funded insurance options.
When employees have few claims and few expensive illnesses, the self-funded employer realizes an immediate positive impact on overall health care costs. Conversely, if the employee group has unfavorable claims experience, a self-funded employer would incur an immediate expense beyond what may have been expected. Insured plans have a more predictable cost for the year; however, large employee claims costs from one year can affect future premium amounts.
ERISA versus State Regulation
Self-funded health plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). ERISA preempts state insurance regulations, meaning that employers with self-funded medical benefits are not required to comply with state insurance laws that apply to medical benefit plan administrators. On the other hand, insured plans must comply with some of ERISA’s requirements, but are primarily governed by the state where covered employees reside.
The distinction between state and ERISA regulations is important when determining if self-funding is right for your organization.
Premium versus Unbundled Fees
The risk an insurance company takes with an insured plan can be translated into a dollar amount for the employer. That dollar amount is the premium an employer pays each month for the insured group medical benefits. The premium amount includes the following:
- Current and predicted claims cost
- Administrative fee
- Premium tax paid to the state
- Insurance company profit
Employers who self-fund their medical benefits do not pay the premium tax or insurance company profit. They do, however, assume the costs of paying for claims and administrative functions. Typically, employers with self-funded health plans will outsource plan administration to a third party administrator (TPA) or insurance company who charges the employer a fee for performing administrative services.
Stop-loss Insurance
So how to employers deal with high claims? Employers with self-funded health plans typically carry stop-loss insurance to reduce the risk associated with large individual claims or high claims from the entire plan. Stop-loss insurance comes in two forms: individual/specific stop-loss and aggregate stop-loss.
Individual or specific stop-loss protects the employer against large individual health care claims. It limits the amount that the employer must pay for each individual. Aggregate stop loss protects the employer against high total claims for the health care plan.
Nondiscrimination Rules
Nondiscrimination rules require employers to offer employee benefits that do not favor certain employees. Employers with insured plans do not have nondiscrimination rules for group medical benefits, provided they follow the policy requirements of the sponsoring insurance carrier. However, employers with self-funded plans are required to comply with nondiscrimination rules. Generally these requirements are not difficult to meet, but failure to comply can result in some employees having their benefits treated as taxable income.
Additional Reporting & Disclosure Requirements
Employers with either type of group medical plan are required to comply with certain reporting and disclosure requirements, usually by providing tax and other pertinent documents to the United States Department of Labor or to their particular state. Typically self-funded plans are required to provide copies of plan communications such as summary plan descriptions (SPDs) and summary of material modifications if the plan language changes. Employers with insured plans that require employee contributions must file certain financial documents with the U.S. Internal Revenue Service (IRS). IRS filings are also required of self-funded plans, including Form 5500 and any accompanying documents.
Finding the Right Broker
Deciding as an employer to be self-funded is a big decision. You need a broker that can weigh the options as well as keep you compliant with laws and keep you up to date on your group performance. AUI works with many self-funded clients large and small. We also offer a variety of products for small group self-funding that are not available to all brokers. If you would like more information about how we can help you, please contact us.
This blog post is a supplement to our webinar on self-funding insurance plans. If you would like to learn more about the benefits AUI has available to clients, please contact us!
