One of the key advantages to self-funding (besides avoiding annual trend rate-ups when renewing a traditional health plan) is that you, as employer/organization retain control over the health plan’s reserves, meaning you control the account and interest income. As you set aside money per month for health coverage you are accumulating that money (minus costs for reinsurance, TPA services,…) in a reserve account. And after you’ve paid all claims for the year, you retain any self insurance reserves that are left for future use.
In self-funding or partial self-insuring, a self-insured employer will usually set up a special tax-free trust fund or account to set aside money (including both corporate and staff contributions) to pay incurred claims as they occur.
Self-insured organizations can then either verify and pay those claims in-house, or hire an outside service such as an third party administrator (TPA or ASO).
Basically early in the year, or when new to self-funding, you will be building this reserve account. After steady growth if you find your account over-funded, you or your Board will decide how to apply excess reserves, either by lowering premiums to employees, creating a better benefits package, subsidizing national workers or overseas staff, or using overages to offset the rise in actual costs and future medical claims. Some organizations set a goal to address more than one of these items.
As your covered individuals understand and use their benefits carefully, the advantage is direct and immediately felt.
Benefit of Self Insurance Reserves – Increased cash flow/Wisely managing assets
Self-funding allows claims to be paid for as they occur. Fully insured plans constitute a form of pre-payment. Under self-funding, you control the money for recurring health plan costs until those services have been rendered. Thus, the cash-flow benefit is immediate and ongoing.
How much? (General rule of thumb)
Good Neighbor Insurance, your actuary and TPA will help you determine how much money to put in. Generally (and we stress generally!) to start employers will want to have at least two months reserves on hand to cover basic claims for all employees on your plan for “run-out” purposes, and six or seven months of reserves on hand to meet any catastrophic need depending on your stop-loss policy.
“Incurred but not reported” (IBNR) reserves: 20-25% of total annual claims.
If your account is underfunded due to a miscalculation on the amount of claims any given year, you may have to consider either adjusting the benefits package itself, amount of employee contribution, or whether your plan design is actually accomplishing your goals. Outside of having an unanticipated bad year, usually we have seen this is the result of poor plan design, esp. in regards to behavior and claims. And that’s good news for you, because we can help. Plan design is a specialty of ours after more than a decade of helping organizations control costs and plan well.
Legal requirements of Self Insurance Reserves?
ERISA § 401(b) requires that any self-funded plan not only have a funding policy, but that such policy be stated in your plan document. The setting of this funding policy will involve numerous decisions or considerations that determine coverage and is based on a variety of factors.
Realize that once the employees’ monies have been paid into the company health plan, they are no longer employees funds.
It is the same as though the coverage were fully insured. The employer pays a percentage (amount) toward the policy premium and the employee pays a percentage (amount). Once the insurance company receives x and y, there is no requirement to separately account for those funds, they are simply premium income. Same with the reserve account which is used to pay claims. The company is then legally responsible (based on their health coverage documents) to pay the insured’s claims, regardless of the amount of reserves currently held in the account.
More can be found in “Self-funding of Healthcare Benefits” (fifth edition) by Carlton Harker, referenced in this link: https://sfasi.com/self-funding-of-health-care-benefits
Your plan may fall within or under one or more of the following federal laws, including the Employee Retirement Income Security Act (ERISA), Health Insurance Portability and Accountability Act (HIPAA), Consolidated Omnibus Budget Reconciliation Act (COBRA), the Americans with Disabilities Act (ADA), the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and various budget reconciliation acts such as Tax Equity and Fiscal Responsibility Act (TEFRA), Deficit Reduction Act (DEFRA), and Economic Recovery Tax Act (ERTA).
Also consider your Fiduciary Liability.
Under a fully insured plan, the insurance company is in control of approving claims and many other aspects of plan administration. This also entails potential fiduciary liability. Under self-funding, since you have discretion over claims determination and plan administration, you usually also assume the fiduciary liability. Here lies the critical importance of thoroughly defining and properly maintaining the plan’s governing documents. In some cases (but not all), if you have an ASO (an insurance company that is paying your claims on a TPA basis) they will take on the fiduciary liability for a fee.
A practical word on protecting the reserve account from other organizational needs:
Working with non-profits, and charitable groups has given us unique insight into how groups make do with less and overachieve compared to similar groups in the marketplace. At the same time, groups must take care to protect funds in reserve accounts from being used for other critical needs, even for a short time frame. All stakeholders need to understand and safeguard health reserve accounts from other usage.
If you have additional questions please feel free to give us a call at (480) 813-9100. We’ll put you in touch with our specialists in the Group Department that handle Self-funding.