Merritt Personal Lines Manual: Chapter 2 Self-Funded Plans
Your employer may have set up a financial arrangement that helps cover employees' health care expenses. Sometimes employers do this and have the health plan administered by an insurance company, but sometimes there is no outside administrator.
A self-funded plan is a program which allows a financially secure employer to assume the risk for health care costs instead of transferring the risk to an insurance company. The employer's funds are used to pay benefits directly to the employees.
Instead of paying insurance policy premiums to an insurer, the employer places a sum of money into a secured account to provide health care benefits, usually with certain limitations.
In essence, the employer has become a "mini-insurer" providing various types or levels of health care.
A self-insured plan is a less expensive way for an employer to provide health care benefits, provided the claims experience is favorable and the employer can realize a good rate of return on the money deposited in the trust account. Employers often choose a self-funded plan to cover their employees' dental expenses because it is less expensive than purchasing a dental plan.
With a self-funded plan an employer, not an insurance company, provides the funds to pay claims for company employees and their dependents. In the event that claims are higher than predicted, a self-funded health insurance plan can be backed-up by a stop-loss contract. A stop-loss contract is designed to limit the employer's liability for claims.
There are two variations of this coverage. Specific stop-loss coverage begins to apply after an individual's medical expenses exceed a predetermined threshold such as $5,000. Aggregate stop-loss coverage applies when the employer's liability for group insurance claims exceeds a specified amount. The insurance company pays all claims once the specified amount is reached.
A self-funded plan may be an indemnity program which reimburses covered employees for medical care they have received. Or, the employer may provide benefits through the service plan offered under an HMO or through a company's PPO network.
An insurance company can also be used by a self-funded employer under an "administrative services only" (ASO) contract. Under an ASO agreement the insurance company provides claim forms, administers claims and makes payments to providers; but the employer still provides the funds to make payments. It's easy to confuse an ASO contract with traditional insurance but they aren't the same thing.
If claim costs are fairly consistent, the insured's employer may consider a self-funded health care plan. With a self-funded plan the insured's employer, not an insurance company, provides the funds to make claim payments for company employees and their dependents.
In the event that claims are higher than predicted, a self-funded health insurance plan can be backed-up by a stop-loss contract. The stop-loss contract is designed to limit the insured's employer's liability for claims.
Generally, there are two variations of this coverage. Specific stop-loss coverage begins to apply after the insured's medical expenses exceed a predetermined threshold such as $5,000. Aggregate stop-loss coverage applies when the insured's employer's liability for group insurance claims exceeds a specified amount. The insurance company will pay all claims once the specified amount is reached.
An employer self-funded plan may be an indemnity program which reimburses the insured for the medical care the insured have received. Or, the insured's employer may provide benefits through the service plan offered under an HMO or through the insurance company's PPO network.
An insurance company may also be used for a self-funded employer to help out with needed administrative services.
Under this arrangement, the insurance company will provide claims forms, administer claims and make payments to health care providers; but the employer will provide the funds to make claims payments.
Self-insurance has four major advantages:
- The company can save money if actual losses are less than those predicted.
- The expense of carrying insurance may be reduced because of the elimination of administrative costs, agent commissions, brokerage fees and premium tax.
- Because the company has assumed the entire risk, there may be a greater effort on its part to seek ways to reduce claims and encourage employees to actively participate in "wellness" programs and improved lifestyles.
- The company has use of the money that would normally be held by the insurance company.
The main disadvantages of self-insurance include the following:
- Actual losses may be more than predicted, causing the unexpected loss of funds that were to be used for other purposes.
- Expenses could be higher than expected if additional personnel have to be hired to administer claims, manage risk or offer employee information.
- Income taxes could be higher because the company will not be able to take premiums paid as a deduction; only the claims paid and operating expenses may be taken as a tax deduction.
With self-insured health plans, certain federal laws may apply; if a plan is not state regulated, the insured may want to talk to an attorney specializing in health law before getting involved.
As a rule, partners and sole proprietors are considered self-employed individuals, not employees, so the rules for personally-owned health insurance apply. Government allows anyone who is self-employed to deduct a portion of their health insurance premiums. Under new tax laws this deduction will be gradually increased and is now 80%.
If the partnership pays the premiums for medical care insurance on the partners without regard to partnership income, premiums are deductible by the partnership but are included in the partners' taxable income.
Self-insured plans are typically offered by financially strong companies who are able to deposit adequate sums of money to cover employee's medical expenses. Generally employers who install self-insured plans will use the administrative services of an insurer or a third-party administrator (TPA).
