Forewarned Is Forearmed
Though there are many advantages self-funding is not for every employer. Employers must consider the risks of self-insuring:
- Risk to Company’s Financial Resources – Self-funding requires a company to have the cash flow to meet the health plan claim obligations. These obligations can be quite unpredictable and subject the company to financial strain unrelated to the core business performance. And, for a small company, if the health claims arise from a serious illness or accident to a company leader the strain can be especially severe; consider these minimum financial criteria.
- Legal – Numerous laws apply to self-funded plans 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). These laws seek to protect the interests plan beneficiaries and require special care from plan sponsors. As an example, under ERISA, any employee contributions should be held in a trust for the exclusive benefit of the plan beneficiaries.
- Budgeting and Planning – Unlike a known monthly premium payment, monthly funding for a self-funded plan can be unpredictable requiring a strong capacity for planning and access to short-term working capital.
- Stop Loss Insurance – Almost all employers, with the exception of the very largest, incorporate some sort of stop loss protection to protect the company against significant claims from an individual (specific stop loss) or for the entire covered group (aggregate stop loss). These plans are often subject to highly customized features which must be carefully considered. As an example, many of these contracts pay claim reimbursements only on a quarterly basis requiring the employer to prefund the benefits before being reimbursed.
Sarah Friend, Employee Benefits Consultant
The Partners Group