Employee Medical Benefits: Self-Funded vs. Fully Insured
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; however, these employers typically require greater stop-loss insurance protection than larger employers (stop-loss insurance is discussed in greater detail below). As a general rule, employers with fewer than 100 employees fully insure their group medical benefits.
The risk assumed in either situation is the chance that employees will become ill and require costly treatment. When employees have few claims and limited high-cost 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 may incur expenses beyond what was expected. Insured plans offer more predictable costs for the year; however, large employee claims in one year can affect future premium amounts.
ERISA vs. State Regulation
Self-funded health plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). ERISA preempts state insurance regulations, meaning employers with self-funded medical benefits are not required to comply with state insurance laws that apply to insured medical plans. Insured plans must comply with certain ERISA requirements, but are primarily governed by the state in which covered employees reside.
The distinction between state and ERISA regulation is important when determining whether self-funding is right for your organization. Multi-state companies with insured health plans must comply with the regulations of each state in which they operate and have covered employees. Multi-state self-funded plans must comply primarily with ERISA.
Premium vs. Unbundled Fees
The risk an insurance company assumes with an insured plan is translated into a dollar amount for the employer. That dollar amount is the premium paid each month for insured group medical benefits. The premium typically includes:
- Current and projected claims costs
- Administrative fees
- Premium taxes paid to the state
- Insurance company profit
Employers who self-fund their medical benefits do not pay premium taxes or insurance company profit. They do, however, assume responsibility for claims costs and administrative functions. Typically, employers with self-funded health plans outsource plan administration to a third-party administrator (TPA) or insurance company, which charges a fee for administrative services.
Stop-Loss Insurance
Employers with self-funded health plans typically carry stop-loss insurance to reduce the risk associated with large individual claims or high overall plan claims. The employer self-insures up to the stop-loss attachment point, which is the dollar threshold above which the stop-loss carrier reimburses claims. Stop-loss insurance comes in two forms: individual (specific) stop-loss and aggregate stop-loss.
Individual (Specific) Stop-Loss Insurance
This protects a self-funded employer against large individual health care claims. It limits the amount the employer must pay for each covered individual. For example, an employer with a specific stop-loss attachment point of $25,000 would be responsible for the first $25,000 in claims for each participant per year. The stop-loss carrier would reimburse claims exceeding $25,000 within that calendar year for that individual.
Aggregate Stop-Loss Insurance
This protects the employer against high total claims for the entire health plan. For example, aggregate stop-loss insurance with an attachment point of $500,000 would begin reimbursing claims once the plan’s overall claims exceeded $500,000. Any amounts reimbursed under a specific stop-loss policy for the same plan would not count toward the aggregate attachment point.
Non-Discrimination Rules
Non-discrimination rules require employers to offer benefits that do not favor highly compensated or certain classes of employees. Employers with insured plans generally do not face medical plan non-discrimination testing requirements, provided they comply with the sponsoring carrier’s policy requirements. Employers with self-funded plans, however, must comply with federal non-discrimination rules. These requirements are typically manageable, but failure to comply can result in certain employees having their benefits treated as taxable income.
Employers with either type of group medical plan must comply with specific reporting and disclosure requirements, including providing tax and other required documentation to the U.S. Department of Labor or applicable state agencies.
Self-funded plans are generally required to provide plan communications such as Summary Plan Descriptions (SPDs) and Summaries of Material Modifications (SMMs) when plan language changes.
Employers with insured plans that require employee contributions must file certain financial documents with the IRS. Self-funded plans must also complete IRS filings, including Form 5500 and any required accompanying documentation.
