Self-Funded Plan
A self-funded plan, also known as a self-insured plan, is a health plan where the employer assumes the risk of paying health claims. In this instance, the employer chooses not to purchase an insurance policy from an insurance carrier, where the insurer assumes the risk.
What is a self-funded plan?
A self-funded plan is a benefits plan, such as a health plan, where the employer accepts all of the financial responsibility for:
- The eligible employees’ health claims
- All administrative costs that are incurred
This process saves the employer from paying fixed insurance carrier premiums. However, in cases of significant claims, it can be costly, especially if stop-loss insurance is not secured to provide financial protection on claim overages above a specified level. Self-funded plans are often managed by a third-party administrator (TPA) proficient in health care administration and funding. The TPA also may guide the employer regarding the plan’s development, roll-out, and communication strategy.
Why is understanding self-funded plans important to my business?
There are pros and cons to a self-funded health plan. Your risk-tolerance level will determine whether you feel the benefits outweigh the risks. On the plus side, self-funded plans can provide your company:
- Added flexibility to customize your benefits plan(s) to meet the needs of your employee base, including setting deductibles, co-pays, and coverage
- Cost-savings opportunities depending on the types of claims that are covered
- Employee medical coverage is generally not subject to various state insurance mandates, which could include additional insurance fees and taxes
- The potential to retain surplus funds if the annual plan has been overfunded because claims are lower than expected
The downside, however, is:
- They are less predictable than a fully insured plan where monthly costs usually remain fixed and the insurer is ultimately responsible for paying claims
- The potential for underfunding the program to meet severe health conditions requiring significant expenditures, especially for smaller workforces
- The time and stress burden of overseeing the administration and management of the plan, including monitoring the TPA
Some feel that fully-funded insurance plans are safer than self-funded plans, but others feel the risk of moving to self-funded is well worth it.
Summary
Self-funded health benefit plans are those which a company is responsible for fully funding, enlisting a third-party administrator to assist in the creation, implementation, communication, and administration of day-to-day plan oversight. These health plans are subject to the rules outlined in ERISA.
