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Breaking down self-funded health plans

Published on June 7th, 2018 by Triton Benefits & HR Solutions

An important part of the employer-employee relationship is ensuring that workers who operate in a full-time capacity have the necessary health benefits to meet their needs. Self-funded plans are an option many businesses are now considering.

Most companies are familiar with a fully insured plan, which is a more traditional benefits plan, wherein the business pays a premium to the insurance carrier to support any claims on the part of covered employees.

A self-insured, or self-funded plan, on the other hand, works a little differently. 

What is a self-funded plan and how does it work?

As the Self-Insurance Institute of America (SIIA) explains, a self-funded plan means the employer assumes the financial risk for employee health care benefits, and the company pays out of pocket for claims, as opposed to paying a premium to an insurance carrier. 

There are other elements at work within self-funded plans that are important for enterprises and their HR stakeholders to understand as well, including:

  • Specific Stop Loss Insurance: This provides certain protection for employers, ensuring that the insurance company will reimburse the business for any eligible claims from one individual that exceed the specific liability limit during a policy year.
  • Aggregate Stop Loss Insurance: This protects the business in the event that eligible claims for the entire covered group exceed the annual aggregate liability limit.

In this way, while the financial risk of employee health care falls mainly on the company as opposed to the insurer, there are safeguards in place for the business itself to ensure protection against large and unexpected claims. 

Health Insurance Claim Form on a clipboard with a stack of money, a calculator and a stethoscope nearby. Under a self-funded plan, the employer pays out-of-pocket for employee claims.

Why choose to self-fund?

There are certain reasons that can motivate a company and its HR team to opt for self-funded health plan benefits as opposed to a fully insured plan.

Self-funded support isn't governed by state-mandated rules for health benefits, which can provide more flexibility. In this way, companies can better customize the plan to meet the unique needs of its workforce.

In addition, stop loss insurance provides an effective means of risk management.The employer is able to set the amount covered, and varying monthly costs can be more granularly controlled through aggregate stop loss insurance.

Self-funded plans are not subject to conflicting state health insurance regulations and benefits mandates. Instead, these plans are regulated by federal law.  For example, self-funding also offers certain advantages when it comes to tax time. Because there is no premium tax involved with self-funding, the business automatically saves the 2 percent it would have to pay with a fully-insured plan. For instance, a company that pays an annual premium of $626,000 for a fully insured plan must pay $12,520 for its premium tax. A company with a self-funded plan, on the other hand, pockets this $12,520 and can put it toward more pressing internal initiatives.

"Instead of trying to purchase a 'one-size-fits-all' health plan, self-funded plans can be customized to fit the needs of an employer's workforce," explained Steve Rosenthal, Triton Benefits and HR Solutions President and CEO.

At the same time, this style of health benefits does have its drawbacks, particularly for smaller companies. As SIIA pointed out, the employer must have the necessary financial resources to support its commitment to funding employee health benefits. In this way, smaller organizations or startups with less cash flow might find that self-funding simply isn't a viable option.

There are multiple elements at play and considerations that employers must make when it comes to their employee health benefits. Our webinar explains more about how self-funded plans work, the protections available for employers, and the perks and potential disadvantages that HR teams should think about.

When you're ready to take the next step to discuss whether a self-funded plan is an option for your organization, please connect with the broker experts at Triton Benefits & HR Solutions today.