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Self-insured plans
Instead of contracting with a health insurer to provide group health insurance, you may wish to consider a self-insured health plan. Self-insured health plans are also called employer-based health plans.
About 55 percent of workers that have health insurance are covered with self-insured group health plans, according to the Employee Benefit Research Institute (EBRI).
A self-insured plan is a health insurance plan you set up to pay health care expenses for your employees. Unlike a group health plan that requires you to pay premiums, a self-insured plan requires you to pay health care expenses as you incur them. You can still require employees to contribute to a self-insured plan by making payments to a custodial account.
A self-insured plan means that you bear all the financial risk. Still, if you have a relatively young and healthy workforce, it may be cheaper to self-insure than to pay an insurer. In order to cap the maximum amount you might owe for health care expenses, you may wish to acquire stop-loss insurance.
A third-party administrator (TPA) can help you to obtain stop-loss insurance and administer a self-insured group health plan. Employers routinely hire a TPA to manage their employee benefits or retirement programs. For additional information on obtaining stop-loss insurance, see the Web site of the Self-Insurance Institute of America (SIIA).
Another reason you may wish to self-insure is that the timing in which your employees incur health care expenses is different from when the premiums are paid. By self-insuring, you retain control over the use of funds until you have to pay a health care provider.
The Employee Retirement Income Security Act (ERISA), the federal law that protects employees' retirement income and benefits, regulates self-insured health plans. If you have a dispute with your self-insured plan, contact the U.S. Department of Labor (DOL) instead of your state insurance department. The federal agency is responsible for ensuring compliance with ERISA.
Self-insurance can also be used for workers' compensation (workers comp) insurance in some states. Check with your state insurance commission. The Web site of the National Association of Insurance Commissions maintains a directory of state insurance commissions.
The SIIA estimates about 6,000 employers nationwide use a self-insured plan for workers' compensation. Like a self-insured group health plan, a major advantage of a self-insured plan for workers' comp is that it allows you to have better control over payments.
Major drawbacks of a self-insured plan are the additional administrative cost of operating your own health plan and the uncertainty of when employees may use their benefits. You should weigh any potential savings with these additional costs to determine whether a self-insured plan is the right solution for your business.
A self-insured health plan requires you to have enough cash flow to pay employee health-related expenses. Having enough in cash flow is likely to be more of a factor for small businesses than for more established firms. However, the SIIA argues that small businesses with as few as 25 employees have been successful in using self-insured plans.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
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