What’s the best way to fund your employee benefit plan?

When it comes to funding your employee benefit plan, you have lots of options — so many that it can be challenging to decide which one is right for your organization. This guide lists the pros and cons, but it’s complicated. Ready to talk benefits? We can help you explore your options.

Fully insured

What could be simpler? You pay a monthly fixed premium and your insurance carrier pays all claims.

Some of the advantages: 

  • You get a predictable monthly cost. Budgeting is a breeze.
  • Your carrier assumes fiduciary claim liability.
  • Your carrier makes all claim coverage decisions, no exceptions.
  • Your results are “pooled” with that of other employers.
  • Your network is fully integrated with your carrier.

Some of the disadvantages:

  • Your carrier keeps any and all profits.
  • You will owe premium taxes on entire premium.
  • You must cover state-mandated benefits.
  • You have limited or no claims reporting.
  • Your cost-control provisions will have limited impact.
  • Your plan flexibility is extremely limited.
  • You may have little notice on rate options and limited options to control them.
  • Your carrier has higher fixed costs. 

Partially self-funded (fully insured high deductible plan with HRA)

You pay a monthly fixed premium for a high-deductible plan and your insurance carrier pays all claims above your deductible. You pay for the difference.

Some of the advantages:

  • You get a predictable cost.
  • Your carrier assumes fiduciary claim liability.
  • Your carrier makes all claim coverage decisions, no exceptions.
  • Your results are “pooled” with that of other employers.
  • Your network is fully integrated with your carrier.
  • You may benefit from unused HRA claim expense.

Some of the disadvantages:

  • Your carrier keeps any and all profits.
  • You will owe premium taxes for HRA plan.
  • You must cover state-mandated benefits.
  • You will have limited or no claim reporting.
  • Your cost-control provisions can have limited impact.
  • Your plan has very limited flexibility.
  • You may have less than two months’ notice on rate changes and limited options.
  • Your carrier will have higher fixed costs.

Level funded with a carrier

You pay a monthly fixed premium equivalent to your carrier, who pays covered claims presented during contract period. Carrier maintains (or defines) reserves for IBNR and upon termination, keeps (or is immediately owed) all reserves.

Some of the advantages:

  • Your annual maximum cost is known.
  • Your carrier makes all claim coverage decisions, with rare exceptions.
  • Your results are based partially upon actual experience.
  • Your network is fully integrated with your carrier.
  • You owe premium taxes only on stop/loss premiums.
  • State-mandated benefits may be excluded.
  • Financial reporting becomes available.
  • You are refunded (or keep) unused funded claim expense.
  • Your stop/loss reimbursement is integrated.
  • It’s easier for you to offer the same program across state lines.

Some disadvantages:

  • You will owe a monthly projected claim expense even if you’ve had no claims.
  • Your cost-control provisions will have limited impact.
  • You have limited plan flexibility.
  • You will usually receive less than two months’ notice on rate changes and will have limited options.
  • You assume some fiduciary claim liability.
  • You will have no claim on audit rights or claim management.
  • A margin is included in premium equivalent factors.
  • This option is usually limited to employers with fewer than 250 employees.
  • Underwriting is more challenging depending upon information available.
  • Deficit carry forward provisions usually apply.
  • Network results have limited transparency.

Level funded with a TPA

You put a monthly fixed premium equivalent into segregated bank account and a third-party administrator pays covered claims presented during the contract period. You maintain defined reserves for IBNR (incurred but not reported) and upon termination, you pay IBNR claims and keep any unused reserves. This option has many of the same advantages and disadvantages as level-funded with carrier plus the following:

Some advantages:

  • You maintain your own bank account.
  • Financial and clinical reporting becomes available.
  • You have more plan design flexibility.
  • You can implement cost control provisions and unique options.
  • Depending on network and programs, you may have stronger claim management.
  • You will have significant transparency on operations and program savings.

Some disadvantages:

  • The monthly cap and stop/loss reconciliation are more challenging.
  • This option normally serves as a transition to a self-funded plan.

Carrier ASO with own stop/loss

You pay the carrier for administration, stop/loss and funds claims on a paid basis from segregated account or general assets, which are adjudicated by carrier. IBNR reserves are projected and, upon termination, IBNR claims are adjudicated and you keep any unused reserves/claim funds.

Some advantages:

  • With stop/loss, your annual maximum liability is relatively known.
  • Your carrier makes all claim coverage decisions, with rare exceptions.
  • Your results are based almost entirely upon actual experience.
  • You are fully integrated into network with carrier.
  • You owe premium taxes only on stop/loss premiums.
  • Your state-mandated benefits may be excluded.
  • Financial and some clinical reporting becomes available.
  • You keep unused funded claim expense.
  • Your stop/loss reimbursement is integrated.
  • It’s simple to offer the same program across state lines.
  • You have more plan design flexibility.
  • You can choose to implement carrier cost control provisions.
  • You receive more advance notice on renewal cost projections.
  • You have more flexibility with eligibility decisions.

Some disadvantages:

  • You will experience claim volatility from month to month.
  • You will have no total cost claim cap during year, only at end of contract period.
  • Your stop/loss maximum is usually 20-50 percent above expected claims.
  • You assume most fiduciary claim liability.
  • You have no claim audit rights or claim management.
  • This option is more challenging if you have fewer than 50-100 employees.
  • You have limited transparency on network results.
  • You may have difficulty transferring data if you decide to change carriers.

Carrier ASO with independent stop/loss

You pay your carrier for administrating and stop/loss claims on a paid basis from segregated account or general assets, with are adjudicated by carrier. IBNR reserves are projected and, upon termination, IBNR claims are adjudicated and you keep any unused reserves/claim funds. This option offers the same advantages and disadvantages as carrier ASO with independent stop/loss plus the following:

Some advantages:

  • This option is best if you desire maximum flexibility.
  • You have the option for reference-based pricing, direct contracts, etc.
  • You can have a direct impact on cost control initiatives.
  • You have the potential to mix networks and specialty vendors.
  • You have extensive financial and clinical reporting.
  • You can limit coverage beyond essential health benefits.
  • You may have significant transparency on operations and program savings.
  • You will have the opportunity to implement member utilization and wellness incentives.
  • Your claim audit and management opportunities are increased.

Some disadvantages:

  • Your greater flexibility may increase demands on HR.
  • You assume all fiduciary claim liability.
  • Terminating your third-party administrator and/or stop/loss can be more challenging.
  • You’ll have many decisions regarding plan operations.

TPA self-funded with stop/loss through a captive

You pay a third-party administrator for administration and stop/loss and funds claims on a paid basis from segregated account or general assets, which are adjudicated by TPA. IBNR reserves are projected and, upon termination, IBNR claims are adjudicated and you keep any unused reserves/claim funds. Stop/loss is handled through a separate insurance entity that pools the claims of the captive participants. This option has the same advantages and disadvantages as TPA self-funded with independent stop/loss plus the following:

Some advantages:

  • Costs are spread out over captive insurance members, so risk is moderated.
  • This option is best for smaller employers, especially those coming from fully insured plans.
  • More stable renewals are possible, and some plans will have no laser liability.

Some disadvantages:

  • You will be required to have collateral, which can be called at any time.
  • It can be hard to leave the captive insurance arrangement.

(Source: Adapted from materials provided by the Association for Corporate Health Risk Management and Group & Pensions Administrators.)

We imagine you might still have some questions. If so, please contact Betsy Yarcho, Vice President, Benefits at BYarcho@Unland.com or call 309-347-2177.

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