The concept of self-funding or self-insurance has been in existence for over 50 years. Instead of making premium payments to an insurance company to pay claims on behalf of their employees, a self-insured employer is involved in payment of claims in a more direct manner. Self-funded benefit plans are subject to the regulations set out in ERISA, the Employee Retirement Income Security Act of 1974. Congress specifically designed ERISA to provide protection for those individuals covered under the law and, at the same time, allows flexibility in plan design.
Cash Flow Advantages
Under a fully insured plan, an employer remits premiums to an insurance company. Conventional fully insured benefit plans build in premium taxes, company overhead, profit margins and costs of state-required reserves as a part of the premiums they charge. In addition to these charges, the insurance company keeps the difference if claims for the year are less than the amount of the premiums submitted. Many of these costs are reduced or eliminated with a self-funded plan because employers do not purchase conventional insurance. Employers can pay claims as they occur, eliminating the need to set aside reserves. This frees up funds for other needs.
Funding Claim Reserves
Many employers set up a claim reserve fund or make regular deposits to an account used for claim payments to protect themselves against the possibility of facing a large outlay in a given month. There are additional tax advantages if the employer chooses to establish a 501(c)(9) Trust for the employee benefit plan. Contributions made to the trust are deductible as a necessary business expense. Any accumulated interest earnings are tax-exempt providing these funds are used exclusively to fund the benefit plan. The plan retains any unused dollars set aside for funding claims on behalf of the employees to offset future expenses. These dollars are still the property of the plan if they are not used during the course of the year.
Stop Loss Insurance
Aggregate Stop Loss Coverage is insurance coverage that provides reimbursement payments to the self-funded client in the event that claims for the entire group exceed the aggregate attachment point. Specific Stop Loss Coverage is insurance coverage that provides payment to the self-funded client for all eligible expenses that exceed the specific deductible for one individual. Any eligible claims which exceed this amount become the responsibility of the excess stop loss carrier.
What are some of the Typical Contract Terms?
Contract terms refer to the time frame in which claims can be incurred and paid by the Third Party Administrator to be eligible for reimbursement by the stop loss carrier. For example a 12/12 contract indicates claims with dates of service incurred and paid within the 12 months of the policy period. A 12/15 contract would extend the payment period an additional three months for claims with dates of service in the first 12 months of the contract. Other typical contracts are 15/12, 18/12, 24/12 and PAID. At Valley Benefits our professional staff will help you determine the best contract terms for your individual company’s situation.
What is a Third Party Administrator?
Self-funded employee benefit plans are not self-administered plans. These plans are subject to changing ERISA and Department of Labor regulations that require compliance in many areas. Employers customarily hire the services of a licensed Third Party Administrator (TPA), or claims administrator, to supervise the day-to-day operation of their plan. Employers receive regular reports from the TPA regarding detailed claims, usage, plan expense and other comparative information. Not all TPAs provide the same level of services. While prompt and accurate adjudication of employee claims is often the area most focused on, TPA functions also include customer service, billing, reporting, document production, reinsurance claims and interfacing with other plan components, such as Preferred Provider Organizations (PPOs), Utilization Review (UR) firms and Prescription Benefit Managers (PBMs).
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