Insurance costs are increasing and employers are feeling the sting. To save costs, many businesses are increasingly doing the exact thing insurance is designed to avoid: self-funding their own benefits programs.
One painful reform having a large impact on workplace benefits is the Cadillac Tax, which is designed to help fund the Affordable Care Act (ACA) by charging a levy on “high cost” health plans. For plans that exceed the maximum coverage cost for individuals ($10,200) or families ($27,500), employers will be charged 40 percent on the portions of the premiums that exceed the planned minimums.
For a tax that won’t go into effect until 2018, it’s certainly having a large effect. Businesses are looking for any alternative to avoid the tax. One way is to make benefits less robust, while incentivizing employees to save for health care. Another, if they have the money for it, is for employers to at least partially fund their own benefits programs.
RELATED: Avoid the Cadillac Tax by Adopting Voluntary Benefits
Playing the Benefits Self-Funding Percentages
According to a 2010 report from the Kaiser Foundation, 93 percent of workers in companies that employ at least 5,000 people are covered or partially covered by self-funded insurance plans.- A full 63 percent of all workers are enrolled in an insurance plan that is either partially or fully self-funded.
- Around 16 percent of employers with under 100 workers self-fund.
- The average annual savings of self-funding health insurance is approximately 12 percent.
Self-Funded Benefits Are Tailored Benefits
When choosing a self-funded insurance model, the business owner has options not available under a standard insurance benefits system. Company-structured insurance packages can take into account the following variables when deciding on which benefits to offer:
- The age of the workforce.
- The assumption of workplace risk.
- The terms of eligibility.
- Extent of coverage.
- Retirement options.
- Amount of employee contribution.
Where the Money to Self-Fund Benefits Comes From
Instead of paying monthly premiums to an insurance company, businesses that self-fund contribute to reserve accounts to cover the costs of insuring and paying claims for their employees. If claims are low and the fund isn’t exhausted, the business, not an insurance company, retains those monies and puts it to its best use.
Cadillac Tax Savings of Funding Benefits In-House
Under the Affordable Care Act (ACA), self-funded programs are exempt from the Cadillac Tax. And while most states levy a premium tax on companies based on the amount accrued in their claims fund, self-funded insurance programs are at least partially exempt.
Some state mandates may also be put aside when choosing a self-funded health care option. Check with experts in your local jurisdiction and consult an advisor as to lessening the regulatory burden placed on insurers.
RELATED: ACA Compliance: New Regulations & Rising Costs in 2016
Putting Self-Funded Benefits Claim Data to Good Use
The Health Insurance Portability and Accountability Act (HIPAA) protects patient data and keeps it secure from prying eyes that may affect an employee’s privacy. Under a self-funded insurance package, all claims are passed through to the business as they’re paid out of a reserve account.
This is advantageous to the employer as it will retain access to claim files over a long period of time. It can reexamine the coverage offered and restructure policies based on what coverage has been used. This flexibility in plan design saves revenues, which can than be diverted to the health maintenance and wellness needs of employees.
Self-Funding Benefits? You Still Need a Backup Plan
In time, a catastrophic event may occur that will threaten the reserve funds. At that point, stop-loss insurance can kick in to cover the costs.
Other ways of managing the risks include:
- Avoiding legal action.
- Monitoring claims.
- Protecting the company against higher-than-average claims.
- Protecting from exposure to severe losses.
- Protection against reserve insolvency and the inability to procure traditional health care coverage.
Administration of a Self-Funded Benefits Program is a Great Duty to Outsource
Some companies choose to administer the self-funded health care program in-house, although this has often proved to be more costly than using a third party administrator (TPA.)
Employers who self-administer are exposed to the liability of “fiduciary duty,” which is another way of saying that you are legally responsible for administering your plan in the best interests of the beneficiaries.
The TPA puts a buffer between the business owner and the U.S. Department of Labor, another layer of protection for the business. The TPA is also privy to:
- Stop-loss insurance carriers and prices.
- Network providers.
- Pharmaceutical plans.
- Other services available in the healthcare field.
Wellness Programs Help Lower the Costs of Self-Funded Benefits Programs
One outgrowth of self-funding health benefits is the business owner’s involvement in maintaining the health of employees. In-house clinics, mobile nursing services, exercise and physical activity programs, and a lifestyle involving good health are promoted. The better the health, the fewer the claims, the fewer days of work lost and the lesser pull on the reserve account.
Risk and Reward of Funding Your Company’s Own Benefits
Using corporate coffers to pay for your organization’s health coverage is a big step, especially for a company with under 100 employees. Speak with professionals and TPAs, evaluate the health of your employee base, and plan on it taking several years for the ROI to prove itself.
Being ahead of the game means planning for the future. Businesses are preparing to do just that.
If you found this article useful, may we suggest the following:
- For more on workplace benefits, read How to Secure Fortune 500-Level Employee Benefits for Your Small Business
- For more on how to outsource benefits administration at your company, read What Are the Functions of a PEO
