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Hassle-Free Health Coverage: Self-Insured Plans

If claim costs are fairly consistent, your employer may consider a self-funded health care plan. With a self-funded plan, your employer -- not an insurance company -- makes claim payments for company employees and their dependents.

If 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 your employer's liability for claims.

Generally, there are two variations of this coverage. Specific stop-loss coverage begins to apply after your medical expenses exceed a predetermined threshold such as $5,000. Aggregate stop-loss coverage applies when your 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 you for the medical care you have received. Or, your 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, you 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. The deduction was 30 percent for tax years 1994 through 1996. Under new tax laws this deduction will be gradually increased to 80 percent by the year 2002.

If the partnership pays the premiums for insurance 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).

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