What is Self Funding? Part 1 in a series

We will start with an overview of self-funded medical plans. Essentially, a self-funded plan is a fully insured medical plan that is broken into its different parts.

To an employee, the difference is not noticeable – they still have a plan deductible, a network of providers, co-pays, drug benefits, and other familiar parts of a medical plan. They go to the doctor, pay their portion, and the insurance pays the rest.

However, for an employer, things are much different. On a fully insured basis, the employer picks a plan, pays the monthly premium, and hopes the renewal is not too bad. With a self-funded plan, the employer creates their own schedule of benefits (more on that later), utilizes underwriting to create a claims pool, and gets to choose all the vendors that handle claims, insurance protections, drug benefits, etc. Also, because the employer pays claims, they get great information on what was paid, prescription drug and large claim information, and lots of transparency of where the money is going.

The biggest difference between Fully Insured and Self-Funding is who retains the un-used claims dollars. In a good claims year, Self-Funded clients keep un-used claim dollars. In a bad year, Self-Funded clients have insurance protections that cap the claims expense. In a Fully Insured plan, the insurance carrier keeps un-used claims dollars.

Now, the purpose of this article is not to sell a fully insured employer on going self-funded. There are benefits and a need for both types of medical plans. What you will learn from this series of articles is that a fully insured medical plan uses the same tools as a self-funded plan. By learning self-funding, you will have a better grasp on how your fully insured plan works.

So, let’s begin with an overview of the parts of a self-funded plan.

There are 3 parts of a self-funded plan:

1. Fixed cost (Administration, Specific Stop-loss and Aggregate Stop-loss Insurance)

2. Claims

3. Run-off (Terminal Protection)

On a monthly basis, the “premium” of a self-funded plan is made up of the cost of someone physically processing the claims (Administration cost), the potential claims liability per employee (Claims), and the cost of protecting the claims pool (Specific Stop-loss and Aggregate Stop-loss insurance). The Run-off (Terminal Protection) does not come into play until you either change administration companies, or decide to go back to a fully insured plan after being self-funded. Run-off acts like a “mini” self-funded plan (and yes – more on that later).

In the next coming articles I will talk about a specific section of a self-funded plan. Next topic – Fixed Cost. We will talk about Administration in a self-funded plan.

Do You Have a 125 Plan Document?

If you’re not familiar with the term, a Section 125 plan is the plan that allows employees to pay for their share of medical and dental premium out of their paycheck on a pre-tax basis. Flexible Spending Accounts and Dependent Care Accounts are also part of the Section 125 plan.

Did you know that in order to offer pre-tax payment, an employer must have the proper plan documentation in place? You need to have an official document drawn up that sets up the Section 125 plan and all of its parts. The plan must be kept on file, updated yearly, and must be signed!

One of the big up and coming areas for IRS audit is the Section 125 plan. Frequently, employers are getting requests from the auditors to fax or send in the signature page from their 125 plan document. If this happens to you, don’t just grab your unsigned document and sign it (or backdate it for that matter). As I mentioned earlier, Section 125 plans can go through annual revisions and it is east for an auditor to know what the most recent version of the document language you have.

It pays to have a professional keeping up your document for you. Have you made changes to your benefit plans that now require a Section 125 plan wording change? Your broker should be reminding you about keeping the document up to date as you make benefit plan changes. A quality Section 125 plan administrator will send you any needed annual legislative wording updates. They should send you an annual questionnaire to get updated benefit information.

I’ve often seen offers from carriers, especially worksite plan marketers like AFLAC, for “free” 125 plans. Make sure that these “free plans” provide you with a signature ready plan document and annual updates. Most of the time I’ve found it is better to hire an administrator to do these documents instead. Most often the FICA savings from pre-tax premiums will cover the cost of creating and maintaining the Section 125 plan. Even if you have to pay a little extra to your Section 125 plan administrator for the document and annual changes, isn’t that less expensive than tax penalties?

5 Tips for Avoiding Headaches when Renewing Your Company’s Benefit Plans

It never ceases to amaze me when talking to a new client and hear how their past renewals have gone. They are spending thousands of dollars a year, and most of the time benefits are their second largest expense. I’ve heard stories of last minute decisions, faxed renewals, and hands thrown up in frustration. It does not have to be this way! By following these 5 tips you can ease into the renewal process and make informed intelligent decisions.

1. Start Early – the sooner you can get started with planning your renewal, the better. Remember, there are many things that have to happen before your renewal date. You need to review your renewal and their options. If you’ve gone to the market, you need to review those options and compare them to your current plans. Once you’ve settled on a plan, you need to communicate the plans to your employees, have them fill out any paperwork, and have them return that paperwork to you. Then the carrier has to go through their final underwriting process, get your approval, load eligibility and benefits into their claims system, and mail out ID cards. Sound like a lot? It is! Your Broker should be aware of the timeframes involved and keep you on track so that you hit the deadlines.

2. Work your renewal. Your current carrier’s underwriting staff sooner than you think calculating your renewal. There are many things that you and your Broker should be doing to make sure that the Underwriters are up to date and are running plan design alternates along with the renewal. Depending on your size and the carrier you work with, optional plan designs are run at different times in the process. Your Broker should be familiar with this process and request the alternates that have been discussed during your renewal planning sessions. Once a renewal is generated, you and your Broker need to work that renewal. Make sure that changes in your employee population have been taken into account by Underwriting. If you want to try and stay with your current carrier, let them know that – if your Broker is savvy he may be able to get you some rate relief by asking the Carrier the right questions and performing a little negotiation. In the event of a big renewal increase, you need to review your alternate plans. Your Broker should know your company well enough to suggest options that fit your philosophy and still save some premium. Of course, all this hinges on starting early! You want to have the time to go through this process and not be rushed into a decision.

3. Get Informed. A recent Texas Law has given smaller employers some very important tools to help the renewal process. Before this law, an employer group had to either self-fund their benefits or have at least 100 employees to get any real data on how their plan was running. With the new laws, if an employer asks correctly, carriers must provide month-by-month premium, life counts, and claims paid. In addition, the carrier must provide information on any claims in excess of $15,000. If he is up to date on the new rules, your Broker can guide you through the process of getting this information.

4. Make a plan. You should not just jump into the renewal process. A successful renewal begins with a good plan. You should know the dates of your renewal and have a timeline of what should happen and when. Before the renewal is even calculated, you should have an idea of what alternatives you have in case of a large rate increase.

5. Tie it together. You may have several benefit plans through several different carriers. One company may handle your health, another may handle your dental plan, and yet another may handle your life and disability. Over time, these plans may get disjointed and renew on different dates. Part of the renewal process should involve reviewing all of these plans to make sure they still work together and fit your goals. Does your dental plan renew in April and your medical plan renew in May? There are ways your Broker can negotiate a solution for this. Review plans to see if they can be combined with one carrier – you can sometimes negotiate multi line discounts and save administrative time.

These are just a few of the things that can help your renewal process run much smoother. Careful planning, having good data, getting started early, working your renewal, and staying on track are key to a successful plan renewal.