Group medical benefit plans for your employees typically fall into one of two categories: self-funded or fully insured. The risk assumed with either model is the chance that your employees will become ill and require costly treatment. However, each type of insurance carries its own set of administrative rules and legal constraints.

Employers with either type of group medical plan are required to comply with certain reporting and disclosure requirements. These typically include providing tax and other pertinent documents to the US Department of Labor or to your state government. There are also a number of other differences that we are going to explore here.

Differences Between Self-Funded and Fully Insured Plans

If you are an employer with a self-funded benefits plan, you pay for your employees’ health care yourself. These funds may come either from a trust or directly from corporate funds.

Essentially, in a self-funded model, you are assuming the risk associated with your employee medical benefits instead of passing it on to an insurance carrier. When your employees have few claims and few expensive illnesses, you, as a self-funded employer, will realize an immediate positive impact on your overall health care costs. If you have reserves set aside in an interest-bearing account, you will see enhanced cash flow benefits as well. However, if your employee group files a high number of claims or reports a large number of expensive illnesses, you will incur an immediate expense beyond what you may have expected.

The primary alternative to self-funding is a fully insured plan. Under a fully insured health benefit plan, an insurance carrier assumes the financial and legal risk of losses related to employee health care. In this situation, you, as the employer, will pay a fixed premium to the carrier each month in exchange for their agreement to carry the risk.

Although fully insured plans have a more predictable cost for the year, a large number of employee claims or a high cost of claims in one year can affect future premium amounts. This can make a fully insured plan less cost-effective in the long-term.

ERISA vs. State Regulation

Self-funded employee health plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). ERISA preempts state insurance regulations, meaning self-funded plans do not have to follow state guidelines and regulations as long as they follow ERISA. If you are considering self-funding, review ERISA prior to committing to your self-funded plan. It’s important to ensure these guidelines are complementary to the existing policies in your organization or that you will be able to modify existing policies to adhere to these guidelines.

Fully insured plans, on the other hand, must comply with some ERISA requirements but are primarily governed by the state where the covered employees reside. In some cases, this is easier for employers to abide by because their organization is already compliant with state laws.

Unbundled Fees vs. Premiums

Self-funded employee medical plans are not required to pay a premium tax or to contribute to the profit of insurance carriers. Instead these plans assume the costs of paying for claims and plan administration themselves. Typically, a self-funded plan will outsource plan administration to a third-party, which is referred to as third-party administration or TPA. This takes the burden of coordinating claims off of the employer. We call this model for distribution of costs “unbundled fees.”

The alternative to unbundled fees is paying a premium. Your premium is the monetary value of the risk your insurance carrier takes on with your fully insured plan. Monthly premiums include your current and predicted claims cost, administrative fees, premium tax paid to the state, and insurance company profit.

Paying a premium is beneficial in that you will know how much you are paying each month, but you will not benefit as substantially from a clean claims record as you would with the unbundled fees structure of a self-funded plan.

Stop-Loss Insurance

Self-funded plans typically carry stop-loss insurance to reduce the risk associated with large individual claims or a high number of claims from the group. When the designated stop-loss point is reached in dollars, the stop-loss carrier will reimburse the claim dollars that exceed the limit.

There are two types of stop-loss coverage: individual, or specific, stop-loss and aggregate stop-loss. Individual or specific stop-loss coverage limits the amount that the employer must pay for each individual employee. It is essentially a limit per person. Aggregate stop-loss coverage, on the other hand, protects the employer from paying a higher amount than expected for the overall number of claims against the plan.

Nondiscrimination Rules

Self-funded plans are required to comply with nondiscrimination rules. This means that you are required to not favor certain employees when distributing the benefits. Generally, these requirements are not difficult to satisfy, but failure to comply may result in employees having their benefits treated as taxable income.

If you have a fully insured employee medical plan, you are not required to follow nondiscrimination rules as long as you follow the policy requirements set out by your insurance carrier. This may be beneficial to organizations who prefer to provide more substantial benefits to executives or others in positions of seniority.

Tax Documentation

Both self-funded and fully insured employee medical benefits have their own requirements for IRS filings and provision of financial documents. Talk to your GIS advisor to find out exactly what you need to provide to stay compliant.

GIS Can Help You Decide

If you’re not sure which employee medical plan is right for you, your GIS advisor would be happy to help. Give us a call today and we’ll guide you through the process of selecting a plan. If you decide neither self-funded nor fully insured is right for you, let us talk to you about some other options you may have. Either way, we’re here for you.