Advantages of Self-Funding

Sharon McReynolds

As mentioned in a prior article, self-funding an employee benefit plan as a long-term strategy to save money works because it does afford an awesome opportunity for an employer to achieve savings plus cost control. Over history, the smaller employers, those traditionally under 250 or even 100 employees, have been hesitant to self-fund their health plan as in the past it was commonly believed that self-funding was only appropriate for “large groups.” Our previously owned third party administrator (TPA), Group Administrators, Inc., survived and flourished on companies with less than 250 employees and several with down to 25 employees. We were able to establish the right plan design, the correct specific deductible amount as well as placement of an aggregate coverage, often paired with a monthly accommodation feature, that allowed our clients to be confident in their determination that self-funding was in fact a formula for success.

The purpose of this article is to allow you to gain some insight into the key determining factors to consider for your company when deciding if self-funding is a viable option for you. The right health plan can and should be an integral part of the proper growth and success of your company, the wrong one can have very negative impacts. We believe you can offer the benefits much larger companies offer, taken down to a proper scale, to benefit you, the small employer.

A self-funded plan affords all groups, regardless of size, the opportunity for savings. You have the opportunity to pay your own claims, while a TPA administers the claims, processing them, issuing ID cards, handling the tasks that the insurance companies typically do. The difference: they hire a “stop-loss” carrier on your behalf to take on a large piece of the risk, leaving you with the risk under the stop-loss amount. Your company pays for the everyday claims, the stop-loss carrier is there to protect you from the run-away claims. If designed properly, you know exactly what your risk is from one year to the next, and oftentimes, from one month to the next. Again, if designed properly, your risk should line up with what you were paying in a fully insured environment.

Obviously there is now some incentive for the employer and employees to be involved in the delivery of health care: cost savings. Wellness programs, HSA’s, consumer-driven health plans with high deductibles paired with programs allowing employees to participate in their own comparison shopping on their respective providers or hospital charges before they are incurred — all are great ideas to incorporate to save money on the overall health plans that we design.

Self-funding also aids the employer in knowing what and where you are paying for delivery of care. Wouldn’t you like to be able to dig into the amount your company is paying toward emergency room visits, or specific drug costs? How about the overall cost for in- and out-of-network claims, or wellness visits? Self-funding will afford you the opportunity to see exactly where your health plan dollars are spent month-to-month, giving you the chance to make informed decisions moving forward at renewal regarding benefit changes or employee contributions. You can tailor the benefits to meet your specific group’s needs. Employers with self-funded health plans see exactly how the plan performs, thus removing the element of surprise at renewal as it relates to substantial increases or decreases in premium.

With over 30 years of experience in the self-funding arena, we welcome the opportunity to discuss the concept in further detail. Please visit our contact us page to schedule a more in-depth discussion.

Health Care Reform Supreme Court Ruling – What It Means For Employers

On June 28, 2012, after much anticipation and speculation, the U.S. Supreme Court essentially upheld the entire Affordable Care Act (ACA) as constitutional. The main issue in the case was whether Congress had the authority under the U.S. Constitution to enact ACA’s individual mandate. Beginning in 2014, the individual mandate requires most individuals to obtain health care coverage or pay a penalty.

Because the Court upheld ACA, employers must continue to comply with ACA’s reforms.

  • ACA changes that have already been implemented will remain in effect, such as the requirement to cover adult children until age 26 and the requirement for non-grandfathered plans to cover certain preventive care services without cost-sharing.
  • ACA’s provisions that are not currently in effect will continue to be implemented as planned. For example, effective for 2013 plan years, participants’ pre-tax contributions to health flexible spending accounts (FSAs) will be limited to $2,500 per year.

While it is possible that changes will be made to ACA through future legislation or court rulings, ACA is the health care reform law currently in effect. Thus, employers should continue to prepare for ACA changes that become effective in 2012 and 2013. Employers should also keep in mind the ACA reforms that will take place in 2014.

ACA REFORMS – 2012 AND 2013

Annual Limits

Beginning Jan. 1, 2014, group health plans will no longer be able to impose annual limits on essential health benefits. However, until then, certain minimum annual limits are permitted. Unless a plan received a waiver of the annual limit requirements, its annual limits on essential health benefits should be set at least as high as the following amounts for each applicable plan year:

  • $750,000 for plan years beginning on or after Sept. 23, 2010, but before Sept. 23, 2011;
  • $1.25 million for plan years beginning on or after Sept. 23, 2011, but before Sept. 23, 2012; and
  • $2 million for plan years beginning on or after Sept. 23, 2012, but before Jan. 1, 2014.

Form W-2 Reporting Requirements

Beginning with the 2012 tax year, employers that are required to issue 250 or more W-2 Forms must report the aggregate cost of employer-sponsored group health coverage on employees’ W-2 Forms. The cost must be reported beginning with the 2012 W-2 Forms, which are due in January 2013. This requirement is optional for smaller employers for the 2012 tax year and until further guidance is issued. This reporting is for informational purposes only; it does not affect the taxability of benefits.

Women’s Preventive Care Services

Effective for plan years starting on or after Aug. 1, 2012, non-grandfathered plans must cover specific preventive health services for women without cost-sharing, such as deductibles, copayments and coinsurance. These services include well-woman visits, breastfeeding support, domestic violence screening, STD screening and contraceptives.

Exceptions to the contraceptive coverage requirement apply to religious employers.

Medical Loss Ratio Rebates

Fully insured plans may receive rebates in August 2012 if they qualify for a rebate from their health insurance issuers due to the medical loss ratio (MLR) rules. The MLR rules require insurance companies to spend a certain percentage of premium dollars on medical care and health care quality improvement, rather than administrative costs. Employers may receive rebates from issuers in the form of a premium credit, lump-sum payment or premium holiday, if permissible under state law. Any portion of a rebate that is a plan asset must be used for the exclusive benefit of the plan’s participants and beneficiaries. This may include, for example, reducing participants’ premium payments.

Summary of Benefits and Coverage

Plans and insurance issuers must provide a summary of benefits and coverage (SBC) to participants and beneficiaries. The SBC is intended to be a concise document – no more than four double-sided pages – providing simple and consistent information about health plan benefits and coverage in plain language. A template for the SBC is available, along with instructions and examples for completing the template and a uniform glossary of terms.

Plans and issuers must start providing the SBC as follows:

  • Issuers must provide the SBC to health plans effective Sept. 23, 2012.
  • Plans and issuers must provide the SBC to participants and beneficiaries who enroll or re-enroll during an open enrollment period beginning with the first day of the first open enrollment period that begins on or after Sept. 23, 2012. Thus, many plans will need to include the SBC in their open enrollment packages for 2013.
  • For participants who enroll in coverage other than through an open enrollment period (for example, newly eligible individuals and special enrollees), plans and issuers must provide the SBC beginning on the first day of the first plan year that begins on or after Sept. 23, 2012.

If either the plan or issuer provides the SBC to a participant or beneficiary in accordance with the timing and content requirements, both will have satisfied their SBC obligations. Thus, a fully-insured plan will satisfy the requirement to provide an SBC to an individual if the issuer provides a timely and complete SBC to the individual.

In addition, once the SBC requirement becomes effective, plans and issuers must provide 60 days’ advance notice of any material modifications to the plan that are not related to renewals of coverage. Notice can be provided in an updated SBC or a separate summary of material modifications.

CER Fees

Self-funded plans and health insurance issuers must pay comparative effectiveness research fees, or CER fees, to help fund ACA’s new Patient-Centered Outcomes Research Institute. The CER fees apply for plan years ending on or after Oct. 1, 2012. The CER fees do not apply for plan years ending on or after Oct. 1, 2019. For calendar year plans, the research fees will be effective for the 2012 through 2018 plan years.

For plan years ending before Oct. 1, 2013 (that is, 2012 for calendar year plans), the CER fee is $1 multiplied by the average number of lives covered under the plan. The CER fee will increase to $2 for the next plan year. For plan years ending on or after Oct. 1, 2014, the CER fee amount will be indexed for inflation.

Sponsors of self-funded plans and issuers must report and pay their CER fees by July 31 of each year for the plan year that ended during the preceding calendar year. The first possible due date for reporting and paying CER fees is July 31, 2013.

FSA $2,500 Contribution Limit

Effective for plan years beginning on or after Jan. 1, 2013, an employee’s salary reduction contributions to a health FSA offered under a cafeteria plan are limited to $2,500. The $2,500 limit will be indexed for cost-of-living adjustments for 2014 and later years.

Elimination of Retiree Drug Subsidy Deduction

Employers that receive the Medicare Part D retiree drug subsidy have been able to take a tax deduction for their prescription drug costs, including costs attributable to the subsidy. Also, these employers do not have to pay tax on the drug subsidy amount. Effective for 2013, the deduction for the retiree drug subsidy will be eliminated.

Additional Medicare Tax Withholding

Effective Jan. 1, 2013, an additional 0.9 percent Medicare tax will apply to high-income individuals. Employers are required to withhold the additional Medicare tax on an employee’s wages in excess of $200,000 ($250,000 for married couples filing jointly).

Health Insurance Exchanges – Notice of Availability

Employers must provide all new hires and current employees with a written notice about ACA’s health insurance Exchanges and the consequences if an employee decides to forgo employer-sponsored coverage and purchase a qualified health plan through an Exchange. This notice requirement generally becomes effective as of March 1, 2013. The Department of Health and Human Services (HHS) has indicated that it intends to issue model Exchange notices.

More agency guidance is also expected on this notice requirement.

ACA REFORMS – 2014

Additional ACA coverage mandates and reforms become effective in 2014. For example, effective for plan years beginning on or after Jan. 1, 2014, group health plans and issuers may not:

  • Impose pre-existing condition exclusions on any covered individual, regardless of the individual’s age;
  • Have a waiting period for coverage that exceeds 90 days; or
  • Apply any annual limits on essential health benefits.

In addition, effective in 2014, ACA’s state-based insurance Exchanges are scheduled to be operational. Also in 2014, the individual mandate will become effective, as will ACA’s “pay or play” penalties for employers. Under the pay or play rules, certain employers with at least 50 full-time equivalent employees will face penalties if one or more of their full-time employees obtains a premium credit through an Exchange. An individual may be eligible for a premium credit either because the employer does not offer health care coverage or the employer offers coverage that is either not “affordable” or does not provide “minimum value.”

FUTURE OF HEALTH CARE REFORM

Although ACA survived a major hurdle when the Supreme Court upheld it, changes may be made to the health care reform law in the future by the courts or by Congress. Legal challenges to ACA’s validity are likely to continue. For instance, Catholic-affiliated institutions have already filed lawsuits challenging ACA’s contraceptive coverage requirement on the basis that it violates their religious freedoms. Also, Republican lawmakers are continuing with their efforts to eliminate or modify some of ACA’s controversial provisions. However, major legislative changes to ACA will likely require a significant shift in power in the legislative and executive branches of government and, thus, will depend on the outcome of the November 2012 elections.

MedCon Benefit Systems, Inc. will continue to monitor the status of the health care reform law, and will provide updated information as it becomes available.