By: HUB’s EB Compliance Team
In the wake of the Affordable Care Act (“ACA”), 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 healthcare. However, many employers (particularly smaller ones) are not willing to take the risk of sponsoring a traditional self-funded plan. Enter the level-funded product.
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 a fully insured plan. However, it provides more financial predictability and lesser risk than paying claims directly, like 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 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 and lower dollar threshold makes level funding particularly attractive to smaller 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:
- Use of Plan Assets. With an insured plan, it is rare to receive a rebate from the carrier anymore 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 portion of the rebate is 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). A full description of how to use plan assets is beyond the scope of this piece, but employers should be aware that the refund is not all “free money.”
- ACA Reporting. Any employer with a level funded plan will have to do some reporting (even if they are too small for the ACA employer 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 who 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 being “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 do 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 items 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 the payment of claims.
Keeping a Level Head
In the end, an employer looking at level funding needs to understand the trade-offs they are making. They get financial predictability similar to an insured product with more plan design flexibility. However, it comes with additional compliance requirements. While these additional compliance obligations can seem daunting, they can be addressed and HUB can help you address them.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.