In the wake of the Affordable Care Act, many smaller employers have looked for ways to self-fund to avoid age-rated premiums, while others are pursuing self-funding to gain a better understanding of their employees’ health risk and gain price transparency in the delivery of health care. However, many employers (particularly smaller ones) are not willing to take the risk of sponsoring a traditional self-funded plan. For this reason, small and mid-sized employers are now considering offering a level-funded plan.
Level Setting: What Is Level Funding?
At its core, level funding (sometimes called “partially self-funding”) involves the employer taking on more risk for claims than with a fully insured plan. However, it provides more financial predictability and less risk than when paying claims directly, as with a typical self-funded plan.
Under a level-funded plan, an insurance company actuarially determines a funding amount for the year based on the employer’s prior experience, just like with a self-funded plan. Then, during the year, the employer pays a set amount to an insurance company every month (some of which is likely collected from employees through payroll deductions) to pay for claims, fixed costs and administrative expenses. This regular, equal payment is why the product is called a “level”-funded plan.
After the end of the year, the insurance company compares the claims paid to the amount contributed by the employer. If the total claims, costs and expenses are less than the employer’s contributions for the year, the employer gets a refund. However, if the total claims, costs and expenses are more than the employer’s contributions, the insurance company covers the shortfall. The greater financial predictability, caps placed on the employer’s financial risk and the potential ability to receive a “refund” for good claim years make level funding particularly attractive to smaller and mid-sized employers.
Doing Your Level Best
Even though insurance caps the employer’s financial liability to the pre-set monthly contribution, a level-funded plan is fundamentally a self-funded plan. As a result, it has to comply with the federal rules governing self-funded plans. These include:
- ERISA and Plan Assets. With an insured plan, it is now rare to receive a rebate from the carrier and the amounts are typically small. However, large rebates are possible with a level-funded plan. If any portion of the funding was paid with employee contributions (including payroll deductions or COBRA premiums), then some portions of the rebate are considered “plan assets” under a federal law known as ERISA. As the name implies, these assets belong to the plan, not to the employer. As a result, the employer cannot use the plan asset portion of the rebate for corporate purposes, like paying the electric bill. Instead, it has to be used for the benefit of plan participants (or returned to them). Employers should be aware that the refund will not always be deemed as “employer money.”
- ACA Reporting. Any employer with a level-funded plan will have to comply with ACA reporting requirements (even if they are too small to be subject to the ACA Employer Shared Responsibility mandate). Employers who are subject to the ACA employer mandate (generally, those with 50 or more full-time and full-time equivalent employees in the prior year) will have some additional information to add to their Forms 1095-C (in Part III of the return). By contrast, employers that are too small for the ACA employer mandate will need to report as coverage providers using Form 1095-B.
- HIPAA Privacy and Security. These rules govern the privacy of the health plan’s information. If an employer has an insured plan, the employer may be able to largely avoid these rules by having “hands off” health information. In that case, the insurer would be responsible primarily for HIPAA compliance. However, because a level-funded plan is self-funded, there is no option to be “hands off.” As a result, the employer will now need HIPAA policies and procedures, and will need to complete a risk assessment and training, among other HIPAA requirements.
- 105(h) Nondiscrimination Rules. These rules generally require that contributions and benefits be no more favorable for highly-compensated individuals. For this purpose, “highly compensated” is the top 25% of the employer’s workforce. Currently, there are not any similar rules for insured plans. As a result, employers moving out of insured benefits to level funding may need to change their plan designs or contribution structures to satisfy these rules.
These are in addition to other regular compliance requirements that would normally apply to a plan (depending on its size) such as COBRA or filing Forms 5500.
On the other hand, because level-funded plans are not insured plans, they are exempt from state regulation. Therefore, level-funded plans are not required to comply with state-mandated benefits, state continuation coverage laws (sometimes called “mini-COBRA” laws) or pay state premium taxes. However, as self-funded plans, employers assume a greater responsibility in establishing the plan design, coverage levels and payment of claims.
Keeping a Level Head
In the end, an employer looking at level funding plans needs to understand the trade-offs it is making. The employer will receive financial predictability, similar to with an insured product with more plan design flexibility. However, it comes with additional compliance requirements.
Liliana Salazar is Chief Compliance Officer for Hub International. She can be reached at 800-432-2558.