Self Funding

What does it mean to Self-Insure (Self-Fund) Employee Benefits?

Self-insuring, or self-funding, of employee benefits is an increasingly attractive option for many employers. We want to help you understand some of the primary differences between insured and self-insured plans, compare the pros and cons of each, and help you decide if self-insurance is the right choice for your organization's employee health care and dental benefits. EmSpring recommends and assumes that you will carry stop-loss insurance, which limits the risk your organization undertakes when choosing to self-insure.

What is self-insurance?

Regular medical insurance transfers the risk of loss to an insurance carrier in exchange for a fixed monthly premium paid to the carrier by the employer. Self-insured companies retain the risk themselves, paying for all claims either from a trust or directly from corporate funds.

Is self-insurance (self-funding) common?

Many employers with more than 200 employees self-insure some or all of their health and welfare benefits. Self-insurance for employers with fewer than 200 employees is also prevalent, though these employers usually need greater stop-loss insurance protection than the larger employers. Self-insured health plans in Washington State are very common. In fact, over half of EmSpring's group health plan clients are self-funded. Several have been in force for over 20 years. (It happens to be our strongest market niche.)

What employee benefits can I self-insure?

• Health care (indemnity, PPO, POS, and HMO [only if large enough group])
• Dental
• Short-term disability
• Prescription drugs
• Vision care

What benefits should not be self-insured?

• Any life insurance benefits, including AD&D and travel accident
• Long term disability - LTD (unless coverage is for a very large group or very limited)
• Long term care - LTC

Six Primary Reasons Employers Self-Insure (Self-Fund) Benefits

1. Reduced insurance overhead costs. Carriers assess a risk charge for insured policies (approximately 2% annually), but self-insurance eliminates this charge.
2. Reduced state premium taxes. Self-insured programs, unlike insured policies, are not subject to state premium taxes. The premium tax savings is about 2% per year in Washington State.
3. Choice of state mandated benefits. Although both insured and self-insured plans are governed by Federal law (predominantly ERISA), self-insured plans are exempt from most state insurance laws. ERISA allows a self-insured employer more flexibility in the design of their benefit program, whereas Washington State benefit mandates add considerably to the cost of insured employer benefit programs.
4. Benefit plan control. The self-insured employer can simply instruct their independent claim administrator to revise insured benefits. Typically, employers must negotiate with carriers over benefit changes and the associated cost or savings. The carrier may be unwilling or unable to make the desired change to an insured plan. Self-insured employers have control.
5. Cash flow. Self-insured programs offer cash flow advantages over insured policies, particularly in the year of adoption when "run-out" claims are being covered by the prior insurance policy.
6. Choice of claim administrator. Employers can choose to have either an independent third party administrator (TPA) or an insurance company administer their plan. Which means the employer gains greater cost competition, choice and flexibility. Conversely, only an insurance carrier can administer an insured policy.

How much can I save by switching to a self-funded model?

On average, an employer can save 4% to 12% per year, depending on the differences between insured and self-insured benefit plan design and on the level of stop-loss insurance chosen. Also, in years when actual claims are less than expected, the employer saves the amount of the surplus. In years when actual claims are higher than expected, the self-insured plan cost may exceed an insured plan premium. Note that savings depends entirely on the group of people to be covered.

What are the downsides to self-insurance (self-funded plans)?

The primary shortcoming of a self-funded plan is the volatility of monthly costs. Even with stop-loss insurance, the employer assumes greater risk than with an insured policy. The volatility can put greater demands on budgeting and monthly cash flow. However, having proper stop-loss coverage amounts generally limit the possibility of large annual cost fluctuations.

Other Considerations When Self-Funding

• Premium rate equivalents. Also called accrual rates or pseudo premiums, the self-insured plan must calculate its own rates on which to base employee contributions, COBRA rates and budgeting. Good TPAs and EmSpring can help!
• Annual reporting requirements. The employer will be responsible for filing annual reports, such as 5500s, Schedule As, and 990Ts. Some brokers like to do these for you, but it's usually best to have your own independent CPA involved.
• Administration. While the employer retains final authority for benefit design and claims payment issues, the day-to-day administration of the plan can, and should, operate in the same manner as the insured policy. The stop-loss insurer approves and the TPA adjudicates claims according to the employer's plan document.
• Trusts. Alternatively called a 501(c) (9) trust or VEBA, trusts allow employers to establish and maintain reserves and more easily avoid co-mingling of employee contributions with company assets. The employer is not required to set up a trust to operate a self-insured benefit plan.
• Accounting and reserving. On an insured policy, the insurance carrier retains the claim run-out liability (claims incurred prior to the policy end date but paid after that date). Under a self-insured plan, this liability shifts to the employer. This “payable" at fiscal year end must be calculated and recognized on the company financial statements. The employer can set up a cash reserve in a VEBA to offset this liability, but reserving is typically no more than a journal entry.

Stop-Loss Insurance for Risk Reduction

Employers typically carry stop-loss insurance on their self-funded health care benefit plans to reduce the risk of large individual claims or high claims for the entire plan. The employer self-insures claims up to the stop-loss deductible, above which claims will be reimbursed by the stop-loss carrier. There are basically two types of stop-loss insurance: individual/specific and aggregate.

Individual or Specific Stop-Loss Insurance

Specific stop-loss protects the employer against large, individual health care claims by applying a dollar “attachment point.” It limits the dollar amount an employer must pay on an individual participant’s claims each year. For example, if the attachment point is $40,000 per participant per plan year, after $40,000 is paid out on that individual in a plan year, the stop-loss takes over for the rest of the plan year. The attachment point’s dollar amount is dependent on the employer’s size and risk tolerance.

Aggregate Stop-Loss Insurance

Aggregate stop-loss insurance protects the employer against high total claims for the overall health care plan. The attachment point is typically 125% of all expected annual claims ($ amount). For instance, if the attachment point were $500,000, then the stop-loss insurance pays after $500,000 in overall plan claims is reached.

How do I decide if I should self-insure some, or all, of my employee welfare benefits, and what stop-loss insurance is right for my plan?

• Hire a competent broker with a solid book of self-insured clients as references.
• Assess the volatility of claim experience for the past three years.
• Obtain administrative services only (ASO) and/or stop-loss quotes at several different deductible and aggregate levels.
• Compare the costs and risks of the different quotes against the insured premium cost.
• Weigh the self-insured plan advantages of flexibility and lower average cost versus the increased risk and associated greater responsibilities.
• Choose the optimum solution based upon analysis.

Employee benefit plan decisions are tough to make. EmSpring has deep experience in self-funded plans and in benefit plan design. We can help you determine whether to insure or self-fund your company health plan.