Level Funding Group Health Plans: What Employers Need to Know

Four years ago we released a blog covering potential benefits and risks for employers seeking to switch from fully insured to self-insured level group health plans – at that time a relatively new concept in the employee benefits realm. It’s still a viable funding method for some employers, and there are still benefits to – and risks inherent within – this strategy. As we wind down this summer season, let’s review essentials of level funding and outline seven compliance considerations.

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Level funding is an attractive alternative for employers (particularly small) who wish to self-insure their employee health benefits.

Avoid some requirements of the ACA and mitigate costs of providing insurance? Yes please!

Pay a fixed monthly claim amount with the possibility of a refund? Yeah!

It’s worth noting, however, that the term “level funding” does not have an official definition; however, such arrangements share common features.

Level Funding 101

A level funded plan is still a self-insured plan. This means the compliance burden rests with the employer, and in some aspects, their plan vendors. We discuss compliance obligations below.  First, however, let’s look at how a level funded arrangement differs:

• The risk corridor for the stop loss insurance is 0%. In other words, the stop loss carrier is responsible for all claims over the expected amount.
• The employer does not pay monthly claims as they occur. Rather, it pays a fixed monthly claim amount to the TPA.  Accordingly, there is no month-to-month volatility and therefore no cash flow issues that are caused by the plan.
• At the end of the year, if the total claims paid are less than the total benefit amount paid by the employer, the employer may get a refund of the difference.[1]

Level Funded Positives:

• Is not subject to community rating;
• No exposure to the risk of larger-than-expected claims or monthly claims volatility; and
• Prospect of a refund if actual claims are less than expected claims.
• Flexibility in plan design, including the ability to offer fewer benefits than insurance companies;

Level Funded Risks:

1. A self-insured plan with no risk corridor looks a lot like a fully insured plan with insurance that is not subject to the laws governing health insurance companies.  Consequently, nearly half the states have laws or regulations that prohibit stop loss carriers from issuing policies that do not include a minimum risk corridor[2].  Carriers may also regulate minimum individual claim amounts, and limit the arrangements to employers with more than a certain number of employees.  In short, level funding as it is frequently described may not be an option.
2. One of the more attractive features of level funding is the prospect that an employer may receive a refund at the end of the year if claims are lower than expected.  Employers need to understand that this refund may not be “free money.” If the plan is considered funded, then the entire amount of the refund will be deemed to be a plan asset and, therefore, must be used to provide ERISA-type benefits.  Whether the plan is funded or unfunded, if part of the benefits were paid using employee contributions, the portion of the refund attributable to those contributions must be allocated in some way to, or for the benefit of, plan participants. Failure to handle a refund in accordance with ERISA can expose the employer to substantial penalties.
3. Last, an employer that adopts a level funded plan may want to return to a fully insured plan.  This could happen if an employer’s claims experience deteriorates to the point that it is cheaper to go with a fully insured, community-rated plan. The employer will want to fully understand what it costs to exit a level funded plan. Obligations on termination may include forfeiture of any claims surplus or funding some period of run-out claims.

Level Funding: 7 Compliance Considerations

1. COBRA administration: which services will you retain? Which will a TPA perform?
2. ERISA’s trust requirement: you may need to maintain plan assets in a trust; consider hiring counsel to advise.
3. Form 5500 reporting: moving to a self-insured plan may require Form 5500 reporting obligations; again, consult counsel and verify plan vendors are providing required data.
4. ACA reporting: obligations may change with a plan structure change. Verify with counsel.
5. HIPAA: oh, HIPAA…privacy and security obligations grow. At minimum this means create, maintain, and train staff on privacy policies, the Notice of Privacy Practices, and assess security measures…or lack thereof…and remediate. Learn more about our HIPAA10 solution.
6. The CAA: Consult counsel if you have a LF plan effective before 2021. The CAA of 2021 requires much of plans. Two of note: first, understand how your plan will report on mental health parity obligations. And second, monitor your brokers and advisors, as they now have a duty to disclose compensation…and employers have an affirmative duty to monitor their disclosures.
7. Vendors: Self-insured plans must meet with, audit, and monitor all TPAs that support the plan. Do you have processes in place to do so, especially if audited?

Bottom Line

Small employers that switch from a fully insured plan to a self-insured level funded arrangement can mitigate risks of self-insurance and potentially reduce benefit costs. But there is no free lunch; the trade-off is a substantial increase in regulatory complexity and administrative overhead.

[1] Employers with fully insured plans may also get a refund under the ACA’s medical loss ratio rules.  However, the latter is based on the experience of the insurer’s community rated block of business rather than the experience of a particular employer.

[2] An employer may also level fund the risk corridor but at a higher monthly cost.