Self-Funding Increasingly Becomes Option for Small Employers
By Thomas Mangan
CEO, United Benefit Advisors (UBA)
PPACA is prompting many small and midsize employers to talk even more seriously about taking the plunge to self-funded health care plans. While the trend has been building for about a decade due to the increased control employers have over plan dynamics, interest has increased recently since it may offer some compliance and cost relief associated with reform. Specifically, starting in 2014, fully insured plans with fewer than 100 employees will have to adhere to community rating rules which won't bode well for an employer with a healthy workforce. If you are considering switching to a self-funded plan, keep the following in mind:
- Talk to your benefits advisor about new options related to plan design. They can help you calculate reserves, develop financial projections, and negotiate rates and fees. Remember to benchmark the plan you choose against your local competitors to create the best plan design.
- Self-funded plans free you from adhering to state-mandated benefits but you'll need to become familiar with ERISA, which governs these plans.
- Make sure to implement or update your wellness plan. Since these efforts will have a direct impact on claims, they are all the more important to include. Consider tying participation to lower deductibles and out-of-pocket costs.
- Purchase specific and/or aggregate stop loss insurance to cap your liability and provide stability. (With specific stop loss the rule of thumb is 10 percent of your claims, so for a company with 50 employees that has claims of $400,000 or less, 10 percent or $40,000 is adequate.)
- Prepare for the financial changes you will experience: the switch from regular monthly payments to fluctuating claims-driven payments and tax implications related to administration fees and stop loss insurance. (The good news is that your taxes should be lower!)
- Determine if a third party administrator would help you process claims and run the plan.
- Prepare to conduct annual discrimination testing in regard to benefits and contributions for non-highly compensated versus highly compensated employees. Under self funded plans, it is not as easy to create classes of employees for the purpose of rewarding management or highly paid individuals.
Download UBA's Self-Funding White Paper: Small Businesses Blaze a New Trail with Self-Funding - Reform and rising costs make small and midsized companies consider a new way to pay for employee health care.