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.

Drive

Okay, I'm hooked on FUEL TV. I don't know if you've seen this channel, but its programming is devoted to surfing, skateboarding, motocross, and BMX. I especially like the BMX/Freestyle stuff, where the athletes do amazing things on BMX bikes - jumps, trackstands, ramp tricks - that blow my mind.

Anyhow, there is a show on FUEL TV called Drive. I recommend watching this show at least once, because the show's concept as it relates to business is genius. Based on the award-winning documentary film, DRIVE: Notes From the Wilderness, the Drive series goes on the road with professional skateboarder Mike Vallely as he travels across the U.S. and around the world exploring the people, places, and issues defining skateboarding and youth culture today. More than just a skate trip, Drive is the world through Vallely’s eyes.

Mike Vallely goes to places where kids have built homemade skate ramps. He goes to places like Africa where kids want to skate but poverty makes it difficult. He goes to urban areas where adults have started skate parks to give at risk youth something to do besides get involved in crime. And Mike skates with them. And talks with them. And motivates them. And gives them free stuff - stuff they would probably never be able to afford.

Mike gets these kids fired up about skateboarding and shows them what it is like to be a professional skateboarder. He gets them involved and excited, which leads to a long term love of the sport. Sales trainers call this "transfer of enthusiasm".

At the end of the show, Mike gives the kids free hats, t-shirts, boards, and promotional items provided by his sponsors. You can only imagine how special these items are to these kids - they were given to them by a pro skateboarder on the TV show that they appeared on! What memories. The sponsors get huge bang for their buck.

Think a moment about your business - are you passionate about what you do? Mike Vallely loves skateboarding and passes that enthusiasm on to others. Do you get others excited about what you do? Do you transfer enthusiasm?

Think also about giving back to your industry. Mike Vallely passes his knowledge on to others. He shows them how to do tricks, build ramps, and try new things. He gives back. Do you give your knowledge to others - not only to clients, but what about young people who might want to do what you do?

Sometimes we get messages from unusual places, and I sure got some great ideas from Drive. But don't worry - I won't be attempting a 50-50 Grind any time soon.

The Value Investor

This past Saturday I attended a client review meeting with a money manager we work with. This half day session was an extremely interesting view into the minds of the managers. These managers embrace the theory of value investing - a focus on purchasing stocks of a company when the stock is at a "discount" and selling at a pre-determined point. The stock is a value at the purchase price - like buying something on sale and then selling it again for its normal price. Now, the explanation I just gave is very basic and value investing is more complex than that. Value investing takes patience and discipline.

The founder of this management firm is a dynamic individual and during his portion of the presentation he spoke of a man named Benjamin Graham. Benjamin Graham was an economist and professional investor who is often called the "Dean of Wall Street". He is considered the founder of the value investing theory. Warren Buffett, the mega-billionaire investor, was a student of Benjamin Graham and was so endeared with his teachings that he named one of his children after him. Buffett, who credits Graham as grounding him with a sound intellectual investment framework, described him as the second most influential person in his life after his own father.

Value investing takes emotion out of the process and focuses on business review and sound principles. Graham writes: "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

I have decided to learn more about Mr. Graham so that I can understand his practice of value investing. After all, if it has worked for the extremely successful management firm I heard from on Saturday, and has worked for Warren Buffett, why not? Graham has written several books on the subject, two of which are "The Intelligent Investor" and "Security Analysis".

The USS Kidd DDG100 Tour!

Last Sunday my daughter and I had a probably once in a lifetime experience - we got to tour one of the Navy's newest members of its fleet. Usually when you get to tour a fighting ship, it is one that is no longer in service and is stripped of its gear. Not so with this ship - it was loaded to the gills and ready to go off to war.

Our Galveston getaway weekend just happened to coincide with the USS Kidd's commissioning ceremony.

On Sunday we had our usual lunch at Willie G's on Galveston's Pier 21, and the USS Kidd was docked about 200 yards away. We overheard another table talking about a tour of the ship they had just finished, so I asked them if the tours were still going on. Sure enough, as soon as we had finished lunch my daughter and I walked over to the USS Kid's security checkpoint and ten minutes later we joined a group of about ten people on a tour of the ship led by one of the crew.

We were led onto the stern (brow?) of the ship and entered through one of the helicopter bays. Man, this ship is impressive and I would not want to be on the receiving end of its fury. We walked past one of the fire suppression units as our guide explained how they could battle various kinds of attacks, including nuclear and biological weapon hits. We saw the mess hall where the sailors ate, and walked through the cramped hallways that they work in. I was amazed at how much equipment was crammed in every nook and cranny, all clearly labelled and in its place. The coolest part of the trip for my daughter and I was seeing the "battle room" - a darkend room full of computers, giant screens, communication equipment, and battle stations that the Commanding Officer and crew use to fight their battles. We then walked out on the bow of the ship where we stood next to the main gun and the forward missile tubes. I didn't bring a camera since I didn't expect to be allowed to photograph anything, but we did miss an opportunity to get a photo on deck.

All in all, it was a great tour of a very impressive ship. The crew was extremely professional and obviously had great rapport with, and respect for, each other. Seeing this symbol of our mighty nation and the men and women who crew her made me proud to be an American. May God bless the USS Kidd DDG100 and her crew as they fight to defend our Nation.

The Ultimate Driving Experience!

Last Sunday I got a chance to go drive BMW X5s. Not just drive BMWs, but push them to their limits. BMW invited me to a half-day event at Houston's Reliant Park called "The Ultimate Driving Experience". This event put me in a car with a professional BMW driver on a closed autocross course to see just what these cars could do.


The day started with my getting into a Z4 Roadster convertible and driving a course around Houston to raise funds for the Susan G. Komen Cancer Foundation. For every mile I drove, BMW made a contribution to the cause.

After the Z4 drive, the real fun began. I went into the classroom for a 20 minute presentation on BMW X5 suspension, engine systems, stability control programs, and car set up. The instructor talked about three other cars - a Lexus GX470, a Mercedes ML500, and the Volvo XC90. He discussed the differences in all these cars, so we would have a background for evaluation. After the talk, we met up with our drivers and headed out to the autocross course. My instructor's name was Dave and since retiring from racing he has made his living in California as a test driver for various car companies, and has driven cars in many commercials - he's the guy they refer to in the small print "professional driver, closed course" on commercials.


We were three to a car on the autocross course - pro driver and 2 passengers. The goal for the afternoon was to learn some driving techniques - cornering, quick stops, accident avoidance, and theory. We got 2 laps each in a Lexus GX470 & Mercedes ML500, and 6 laps in the BMW X5. The course had all kinds of turns - switchbacks, slaloms, and sweeping lefts and rights. We took the course fast, with tires squealing and ABS going haywire. During the laps, the pro driver in the passenger seat would tell us when to brake, steer, and accelerate. The mantra for cornering in a car is "slow in, fast out" - way different from my bicycle racing days where we just flowed through turns. The amazing thing was that for all of the hard braking and poor entry/exit points, neither one of us spun the X5. That car was amazing and we could really push it. I was taking corners that would normally be 20 MPH turns, at about 45 MPH. The cars were pushed so hard that new tires had to be put on every 1-2 days. The Lexus got a new front driver's side tire every day.

The real fun was at the very end - the pro driver got behind the wheel and took us on "hot laps" in the BMW X5. We got in the car, and our driver disabled the stability control, traction control, and put the car in manual shift mode. We then proceeded to haul some serious butt around the course. We took most corners at 60 MPH, triple what I was able to do. I wish I had taken photos - all three BMWs were on the course at once and we were inches from the car ahead of us. On one of the sweeping right hand turns, I looked at the cars ahead and the inside front tires on the X5s were about 2 inches in the air! Very fast, very cool, and very fun. All in all a great afternoon and thank you to BMW for a great time.