Mastering Accounting Entries for Self-Funded Health Insurance Plans
When it comes to accounting entries for self-funded health insurance plans, small to medium-sized business owners often feel overwhelmed by the complexity. To make this easier, here’s a quick outline of the key points:
- Initial Setup: Record the premium equivalency charge, expected costs, stop-loss insurance, and plan administration costs.
- Payroll Deductions: Subtract payroll deductions from employees’ paychecks and post the contributions in a liability account.
- Claims and Payments: Handle claims by making debit entries for claims payable and credit entries as claims are paid out from a trust account.
- Year-End Adjustments: Account for unpaid claim liabilities and any incurred but not reported (IBNR) claims at the fiscal year-end.
Self-funded health insurance gives employers more control over their healthcare costs and plans. Unlike traditional plans where you pay fixed premiums to an insurance company, self-funded plans involve setting aside funds to cover medical expenses, providing both flexibility and potential cost savings.
I’m Les Perlson, an experienced insurance industry expert with a deep understanding of accounting entries for self-funded health insurance plans. With over 40 years of experience in creating custom health insurance solutions, I’m here to help you steer this complex but beneficial approach.
Understanding Self-Funded Health Insurance Plans
Self-funded health insurance plans are a unique way for companies to manage and finance their employees’ healthcare. Instead of paying fixed premiums to an insurance carrier, employers set aside funds to pay for actual medical claims. This approach offers several benefits, including cost savings, flexibility, and greater control over the plan.
Employer-Owned Plans
In a self-funded plan, the employer owns the health insurance plan. This means the company is responsible for paying employees’ medical claims directly. While this might sound risky, it gives employers the flexibility to design a plan that meets their specific needs.
Fixed Costs and Claim Transparency
Even though self-funded plans involve variable costs due to fluctuating claims, there are some fixed costs involved. These include administrative fees and the cost of stop-loss insurance.
Stop-loss insurance is essential for mitigating risk. It protects the employer from exceptionally high claims by reimbursing costs that exceed a set threshold. There are two types of stop-loss insurance:
- Specific Stop-Loss: Covers individual claims above a certain amount.
- Aggregate Stop-Loss: Covers total claims that exceed a specified limit for the entire group.
This setup ensures that while the employer takes on the risk of paying claims, they are protected from catastrophic losses.
Claim Transparency
One of the significant advantages of self-funded plans is claim transparency. Employers have direct access to detailed claims data. This transparency helps identify cost drivers and allows for data-driven decisions to manage healthcare expenses more effectively.
“Self-funded plans provide significant cost savings by eliminating insurance carrier profits and offering the potential for refunds on unused funds. They also allow for plan customization,” notes a resource from NPA Benefits.
Real-World Example
Consider a mid-sized company that switched to a self-funded plan. They noticed that a significant portion of their healthcare costs came from a few high-cost claims. By analyzing the claims data, they were able to implement wellness programs that targeted these cost drivers, resulting in a healthier workforce and reduced medical expenses.
Self-funded plans offer a blend of flexibility, control, and potential cost savings, making them an attractive option for many employers. Now, let’s dive into the accounting entries required to manage these plans effectively.
Accounting Entries for Self-Funded Health Insurance Plans
Initial Setup and Premium Equivalency Charge
When setting up a self-funded health insurance plan, the first step is to calculate the premium equivalency charge. This charge reflects the expected annual costs of providing health benefits, including:
- Expected incurred benefit costs (both reported and unreported)
- Stop-loss insurance costs to protect against high claims
- Plan administration costs for managing the plan
It’s important to work with professional advisors to ensure these estimates are accurate. This charge should not include any provisions for potential costs beyond the expected annual costs.
Recording Payroll Deductions
Employee contributions toward their health insurance are typically deducted from their payroll. To record these:
- Calculate payroll costs and record the overall expense as a debit.
- Add credits for payroll deductions that are subtracted from the employees’ paychecks.
- Post health insurance contributions by employees to a liability account. This ensures that the employees’ portion is correctly accounted for in the company’s ledger.
Handling Claims and Payments
Managing claims and payments involves several key steps:
- Claims Payable Account: When a claim is incurred, debit the contribution deposit accounts (e.g., “Self-Funded Health Benefit Deposits”) and credit the “Claims Payable” account. This records the liability for the claim.
- Payments for Claims: When paying out claims, debit the “Claims Payable” account and credit the cash or bank account used for the payment.
- Trust Accounts: For self-funded plans, claim funds should be kept separate from other business accounts. Many companies use trust accounts to manage these funds, ensuring transparency and proper allocation.
Fiscal Year-End Adjustments
At the fiscal year-end, several adjustments are necessary to ensure the accounts accurately reflect the liabilities and expenses:
- Unpaid Claim Liability: Adjust the “Claims Payable” account to include only the unpaid claim liability and incurred but not reported (IBNR) claims. This involves estimating the costs of claims incurred but not yet reported, based on data from the plan administrator.
- Self-Funded Health Benefit Deposits: Adjust the balance in the “Self-Funded Health Benefit Deposits” account to reflect the district’s share of premium equivalencies for health benefits related to employee services before June 30 but used to fund coverage after that date.
- Excess Premiums: Any amount above the required premiums for “summer payrolls” and prepaid retiree premiums should be credited back to the expenditure accounts. This ensures only actual expenditures are reported.
By following these steps, companies can maintain accurate and compliant records of their self-funded health insurance plans, ensuring they are prepared for any audits or financial reviews.
Next, we’ll explore the self-insurance liabilities on the balance sheet and how to manage them effectively.
Self-Insurance Liabilities on the Balance Sheet
When a company opts for a self-funded health insurance plan, it’s crucial to properly account for self-insurance liabilities on the balance sheet. Here’s a breakdown of the key elements involved:
Reporting Period
At the end of each reporting period, companies need to estimate and record their self-insurance liabilities. This involves evaluating the number of claims initiated during the period but not yet paid. Accurate estimation ensures that the financial statements reflect the company’s true financial position.
Unpaid Claims
Unpaid claims are claims that have been reported but not yet settled. These need to be recorded as liabilities. For example, if an employee submits a medical claim in December but it isn’t paid until January, this claim must be accounted for in the year-end financial statements.
Estimated Claims
In addition to unpaid claims, companies must estimate the cost of incurred but not reported (IBNR) claims. These are claims that have occurred but have not yet been reported to the company. Estimating IBNR claims requires a robust estimation process, often involving actuaries.
“Volatility in the company’s financial results is frequently an outcome of retaining insurance risks as claims often develop differently from what was estimated and recorded as a liability,” explains Walz Group CPA.
Balance Sheet Entries
To record self-insurance liabilities, companies typically make the following entries:
- Accrued Claims Liability:
- Debit: Insurance Expense
-
Credit: Accrued Claims Liability
-
Payment of Claims:
- Debit: Accrued Claims Liability
- Credit: Cash or Bank
Example
Let’s say at the end of the year, a company estimates $200,000 in unpaid claims and $50,000 in IBNR claims. The balance sheet entries would be:
- Debit: Insurance Expense $250,000
- Credit: Accrued Claims Liability $250,000
When claims are paid, the entry would adjust accordingly:
- Debit: Accrued Claims Liability $250,000
- Credit: Cash $250,000
By accurately recording these liabilities, companies ensure they are prepared for audits and financial reviews. This practice also helps in maintaining a clear picture of the company’s financial health.
Next, we’ll discuss compliance with ACA and other regulations to ensure your self-funded health insurance plans meet all legal requirements.
Compliance with ACA and Other Regulations
Ensuring your self-funded health insurance plan complies with federal and state regulations is crucial. Let’s break down the key requirements you need to be aware of, especially those related to the Affordable Care Act (ACA).
ACA Reporting Rules
The ACA has specific reporting rules for companies with 50 or more employees, known as Applicable Large Employers (ALEs). You must file Form 1095-C for each employee and Form 1094-C to the IRS, including copies of all the 1095-Cs. These forms report the health insurance coverage offered to your employees throughout the year.
- Form 1095-C: This form provides details about the health coverage offered to each employee. ALEs with self-funded plans must complete Part III, which includes information about the covered individuals.
- Form 1094-C: This is a transmittal form that summarizes the information provided in the 1095-Cs. It is submitted to the IRS.
Essential Health Benefits
Under the ACA, all health plans must cover a set of 10 essential health benefits. These include:
- Outpatient care
- Emergency services
- Hospitalization
- Maternity and newborn care
- Mental health and substance use disorder services
- Prescription drugs
- Rehabilitative services
- Laboratory services
- Preventive and wellness services
- Pediatric services
While self-funded plans are generally more flexible, they still need to provide these essential benefits, though they may establish their own specific benefits within these categories.
State-Specific Requirements
Self-funded plans are primarily governed by federal law (ERISA), which preempts most state insurance regulations. However, some state-specific requirements still apply:
- Balance Billing Protections: The No Surprises Act, effective in 2022, protects consumers from unexpected medical bills from out-of-network providers. This law applies to both self-funded and fully-insured plans.
- Optional Compliance: Some states offer the option for self-funded plans to voluntarily comply with state insurance mandates. While not mandatory, this can sometimes provide additional protections and benefits to plan participants.
Understanding these regulations helps ensure your self-funded health insurance plan is compliant, protecting both your company and your employees from potential legal and financial risks.
Next, we’ll address frequently asked questions about accounting for self-funded health insurance plans to clarify common concerns and improve your understanding.
Frequently Asked Questions about Accounting for Self-Funded Health Insurance Plans
How do you determine the portion of the account that is plan assets?
When dealing with self-funded health insurance plans, identify which part of the account is considered plan assets under the Employee Retirement Income Security Act (ERISA).
ERISA plan assets include employee contributions toward health insurance premiums. These contributions, even if held in the employer’s general assets due to the trust-requirement relief, are subject to ERISA’s fiduciary obligations, prohibited transactions, and other rules.
For example, if the total monthly premium is $1,000, and the employee pays $200, the $200 is a plan asset. Even though the $1,000 might be in an account under the employer’s name and EIN, the $200 must be treated with fiduciary responsibility.
Can you treat the account as using employee contributions first?
Yes, you can treat the account as utilizing employee contributions first. This means that when accounting, you assume the employee contributions are the first funds used for paying claims or premiums. This method aligns with fiduciary obligations under ERISA, ensuring that employee contributions are used appropriately and transparently.
This accounting process restarts every payroll cycle when new employee premiums are withheld. Each cycle, you need to ensure that the employee portion is accounted for first, maintaining compliance with ERISA rules.
What are the necessary self-insurance reserves?
Self-insurance reserves are crucial for managing a self-funded health insurance plan. These reserves ensure that the company can cover various claims, including indemnity claims (claims involving compensation for loss or damage) and medical-only claims (claims covering medical expenses without additional compensation).
Here are the key components:
- Indemnity Claims: Funds set aside to cover compensation claims.
- Medical-Only Claims: Reserves for covering direct medical expenses.
- Incurred But Not Reported (IBNR) Claims: These are claims that have occurred but have not yet been reported. It’s essential to estimate and set aside funds for these potential claims.
Having adequate reserves helps in managing financial risks and ensuring that all claims can be paid promptly, maintaining the plan’s integrity and reliability.
By addressing these FAQs, you can better understand the complexities of accounting for self-funded health insurance plans, ensuring compliance and financial stability.
Conclusion
At NPA Benefits, we understand the complexities of self-funded health insurance plans and how they can benefit your business. By choosing a self-funded plan, you gain flexibility and control over your healthcare benefits, allowing you to tailor the plan to meet the specific needs of your employees.
Flexible Health Insurance Options
Self-funded plans give you the power to customize coverage levels and incorporate innovative health solutions like Flexible Spending Accounts (FSAs). This flexibility ensures that your employees receive the best possible care without unnecessary financial strain.
Cost-Saving Benefits
Self-funding can lead to significant savings by reducing taxes and fees associated with traditional insurance premiums. It also offers increased cost transparency, so you know exactly where your money is going. This clarity helps you make informed decisions about your healthcare spending.
Control for Businesses and Individuals
With self-funded plans, you maintain control over plan design and can adapt quickly to changing healthcare needs. This control not only benefits your business by managing costs effectively but also provides employees with high-quality health benefits.
Ready to take control of your healthcare benefits? Explore how NPA Benefits can transform your approach to healthcare today.
By choosing NPA Benefits, you invest in a smarter, more flexible, and cost-effective solution for your business and your employees.
