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, typically a health plan, where the employer accepts all of the financial responsibility for: 

• The eligible employees’ medical claims
• All administrative costs that are incurred

This process saves the employer from paying insurance carrier premiums. However, in cases of significant claims, it can have a detrimental effect on the business, particularly if an appropriate fund is not set aside. These funds are often managed by a third-party administrator (TPA) proficient in health care administration and funding. The TPA also guides 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
• Cost-savings opportunities because only claims that are filed are paid
• Employee medical coverage that is not subject to various state medical premium taxes because self-funded plans are governed and protected by ERISA (Employee Retirement Income Security Act)
• Access to stop-loss insurance to provide financial protection on claim overages above a specified level
• The potential to receive money back if the annual plan has been overfunded

The downside, however, is: 

• The potential for underfunding the program to meet severe health conditions requiring significant expenditures
• The time and stress burden of overseeing the administration and management of the plan, including compliance with all relevant government regulations such as the ADA, COBRA, ERISA, and HIPAA
• The legal exposure of creating a defensible health plan document, particularly a qualified health plan document

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. 

History of self-funded plans 

Although self-funded plans already existed, ERISA’s enactment in 1974 solidified them across the U.S. as a viable employer option. Typically a tool used by large corporations, in recent history, small companies with as few as 25 employees have begun to value the flexibility of the self-funded health plan. Some examples of smaller organizations that see the benefit of this type of plan include: 

• Government/public employers
• Churches and not-for-profits
• Private employers

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.