Introduction
When exploring health insurance options, many small to medium-sized business owners consider level-funded plans as a way to control costs while still providing comprehensive coverage. However, understanding the pros and cons of level funded health plans is essential to make an informed decision. Some key drawbacks include potential rate increases following a year of high claims, administrative complexities, and certain regulatory challenges.
Level-funded plans blend elements of self-funded and fully-insured models, offering a fixed monthly payment that covers both the insurance company’s administrative fees and any claims. This structure means you could face unpredictable costs if claims exceed expected levels. Furthermore, these plans involve detailed administrative tasks and compliance requirements that can be daunting for smaller businesses without dedicated HR departments.
Drawbacks to consider:
– Rate Volatility: High claims one year can lead to significant premium increases the next.
– Complex Administration: Requires managing claims processing, benefit administration, and compliance with regulations such as ERISA and ACA.
– Regulatory Exposure: New or forthcoming regulations could alter the level-funded landscape significantly, impacting costs and administration.
Understanding these challenges is crucial for employers considering this insurance strategy to balance affordability with adequate health coverage.
Understanding Level Funding
Level Funding 101
Level funding is a hybrid health insurance model that combines elements of self-funded and fully insured plans. Employers pay a fixed monthly amount to a carrier, which covers administrative fees, stop-loss insurance, and a provision for claims. This model offers predictability in budgeting while allowing some of the financial advantages of self-funding, such as potential refunds of claim funds not used.
Self-Funded vs Level-Funded
In a self-funded plan, the employer assumes the financial risk for providing health care benefits to employees. This means they pay for each claim as it arises, which can lead to significant cost variability. In contrast, level-funded plans cap the financial exposure with a fixed monthly payment. This payment includes stop-loss insurance to cover claims that exceed expected amounts, providing a safety net that pure self-funded plans do not automatically include.
Fully Insured vs Level-Funded
Fully insured plans are where the employer pays a premium to an insurance company, and the insurer bears all the risk. These premiums are fixed and predictable but can be higher than necessary if claims are lower than expected. Level-funded plans offer a middle ground, where employers can benefit from lower costs in low-claim years — potentially receiving refunds on the portion of their payments not used for claims. However, unlike fully insured plans, level funding still requires employers to engage more directly in the management of their health benefits.
Understanding these distinctions helps employers navigate their options in providing health insurance that aligns with their financial capabilities and risk tolerance. Each model offers different benefits and challenges, and choosing the right one depends on a company’s specific needs and circumstances. By evaluating the pros and cons of level funded health plans, businesses can find a balance between cost control and risk management, making it a compelling option for many.
Financial Implications of Level Funding
Predictable Monthly Costs
One of the primary attractions of level funding is the predictability it offers in terms of monthly healthcare costs. Employers pay a fixed monthly amount to the insurance carrier, which covers administrative fees, claims payments, and stop-loss insurance. This set payment helps businesses budget better without worrying about unexpected increases in healthcare costs during the year. However, it’s crucial to note that these costs are based on estimated claims, and actual healthcare needs might differ.
Surplus Refund
At the end of the policy year, if the claims paid out are less than the funds set aside for them, the surplus may be refunded to the employer. This potential refund is an appealing aspect of level funding, as it offers an opportunity to recover some costs if claims are lower than expected. However, the terms of how this surplus is handled can vary significantly between carriers. Some might offer a full refund, others a partial refund, and some might retain the surplus unless the plan is renewed.
Stop-Loss Insurance
Embedded in the monthly payment of a level-funded plan is stop-loss insurance, which protects employers from high claims. It acts as a safety net, covering claims that exceed a certain threshold. This is particularly beneficial for small to mid-sized companies that might not have the financial buffer to handle large, unexpected claims independently. However, the level of coverage and the specific terms of stop-loss insurance can vary, impacting the overall effectiveness and cost savings of the plan.
High Renewal Rates
While level-funded plans can offer initial cost savings and refunds, they also come with high renewal rates. On average, renewal rates can see an increase of over 35% for the first year. This substantial hike can negate some of the savings achieved during the initial plan year. Moreover, if the claims for a year were high, the employer might face even steeper increases. This volatility in renewal pricing can make long-term budgeting challenging and might lead employers to reconsider their funding strategy annually.
In conclusion, while level funding provides predictable monthly costs and potential end-of-year refunds, it also involves navigating the complexities of stop-loss insurance and coping with potentially high renewal rates. These financial implications are crucial for businesses to consider when evaluating if level funding aligns with their financial and healthcare goals. Understanding these aspects will be essential for companies looking to balance control over healthcare costs with financial predictability and risk management.
Administrative Challenges
When it comes to managing a level-funded health plan, there are several administrative hurdles that businesses need to be aware of. These challenges can impact both the efficiency and the cost-effectiveness of the plan.
Plan Administration
Managing a level-funded plan requires a good deal of oversight. Employers must constantly monitor claims and expenses to ensure that the set monthly payments cover the costs. This can be particularly demanding for smaller businesses that may not have dedicated staff for this task.
Compliance Requirements
Level-funded plans, like all health plans, come with a raft of compliance requirements that can be complex to navigate. These include obligations under the Employee Retirement Income Security Act (ERISA) and the Affordable Care Act (ACA).
- ERISA: This federal law sets minimum standards for most voluntarily established health plans in private industry to provide protection for individuals in these plans. Handling ERISA compliance demands meticulous record-keeping and reporting.
- ACA Reporting: Level-funded plans are considered self-funded for compliance purposes. This means even small employers that are not typically subject to ACA employer mandate reporting must comply if they choose a level-funded plan. Businesses must file and distribute specific forms (1094/1095 forms), which can be a significant administrative burden.
PCORI Fees
The Patient Centered Outcomes Research Institute (PCORI) fees are another compliance requirement for level-funded plans. Employers must report and pay these fees using IRS Form 720 by July 31st each year. The fee calculation involves determining the average number of covered lives during the plan year, which can be complex and requires accurate data collection and calculation.
The Role of Third-Party Administrators (TPAs)
Many businesses rely on TPAs to manage the administrative aspects of their level-funded plans. While this can alleviate some of the burdens, it’s crucial for employers to ensure that their TPA handles tasks such as ACA reporting and PCORI fee payments correctly. Mismanagement by a TPA can lead to compliance issues and financial penalties for the business.
Navigating these administrative challenges is essential for maintaining the effectiveness and compliance of a level-funded plan. While the predictability of costs and potential for refunds are appealing, the administrative burden can be significant. Businesses must weigh these factors carefully, considering the pros and cons of level funded health plans, and determine whether they have the resources needed to manage these tasks effectively or if they need to seek external help from experienced administrators or consultants. As we explore further, understanding the potential risks and limitations of level-funded plans will also be crucial in making an informed decision.
Potential Risks and Limitations
Claims Exceeding Coverage
One of the key disadvantages of level funding relates to the uncertainty of claims. While employers benefit from predictable monthly payments, they still face the risk of claims exceeding the expected amounts. When assessing level funded health plan pros and cons, it’s important to note that if claims surpass what’s covered by the stop-loss insurance within a given year, the employer might need to cover the excess. This can create financial strain, particularly for small to mid-sized businesses that might not have the liquidity to handle significant, unexpected expenses.
Cash Flow Issues
Level-funded plans require consistent monthly payments which are calculated based on projected claims. However, if actual healthcare usage is higher than anticipated, it can lead to cash flow issues. For instance, if a series of high-cost claims occur early in the plan year, it might deplete the allocated funds, putting pressure on the business’s cash reserves until the stop-loss insurance can reimburse the excess or until new funds can be allocated in the following year.
Regulatory Risk
Regulatory environments are always subject to change, and level-funded plans are no exception. Proposed regulations by the Departments of Labor, Treasury, and Health and Human Services in July 2023 have highlighted concerns about the growing prevalence of level-funded plans but did not set new rules. However, the attention suggests that future regulatory changes could impact how these plans operate, potentially increasing compliance costs or altering coverage frameworks. Staying abreast of such changes is crucial to avoid compliance pitfalls.
105(h) Nondiscrimination
Another significant risk involves the nondiscrimination requirements under Section 105(h) of the Internal Revenue Code. Level-funded plans, like other self-funded arrangements, must not discriminate in favor of highly compensated individuals (HCIs). If the plan fails these nondiscrimination tests, it could jeopardize the tax-exempt status of benefits received by HCIs. This could lead to penalties and necessitate restructuring of the benefits scheme, which could be both costly and administratively burdensome.
Maintaining the effectiveness and compliance of a level-funded plan requires a keen understanding of these risks and limitations. While the predictability of costs and potential for refunds are appealing, the administrative burden and the financial risks associated with unexpected claims or regulatory changes can be significant. When evaluating pros and cons of level funded health plans, businesses must weigh these factors carefully and consider whether they have the resources needed to manage these tasks effectively or if they need to seek external help from experienced administrators or consultants. As we explore further, understanding the potential risks and limitations of level-funded plans will also be crucial in making an informed decision.
Comparing Health Plan Models
When considering health insurance options, it’s important to understand the differences between Self-Funded Plans, Fully Insured Plans, Captive Insurance, and Administrative Services Organization (ASO) Plans. Each model offers unique advantages and challenges that can impact your business differently.
Self-Funded Plans
Self-funded plans allow businesses to pay for employee health claims directly. This model offers maximum control over the plan design and potential cost savings since it eliminates the need for an insurance carrier’s profit margin and risk charge. However, it also requires a significant cash reserve to cover unpredictable claims and the capability to manage complex health plan administration and compliance requirements.
Fully Insured Plans
In contrast, fully insured plans are where the company pays a fixed premium to an insurance carrier, which then assumes the risk of covering all employee health claims. This model is less risky for businesses as it provides predictability in costs. However, it often comes with higher premiums and less flexibility in terms of plan customization and cost management.
Captive Insurance
Captive insurance is a unique model where a company or group of companies form their own insurance company to insure their risks. This can be particularly advantageous for larger organizations looking to reduce costs and gain control over their insurance policies. Captives allow businesses to benefit from the insurance underwriting profits and investment income. However, they require a substantial initial investment and ongoing management expertise.
ASO Plans
Administrative Services Organization (ASO) plans are a form of self-funding where the employer retains the financial risk of providing health benefits but outsources the administration of the plan to a third-party administrator (TPA). This setup can reduce administrative burdens while maintaining cost control and plan design flexibility. However, businesses still need to cover the direct costs of claims, which can be financially volatile.
As businesses consider their options, it’s crucial to evaluate not only the financial implications but also the administrative capabilities required to manage each type of plan. When assessing level funded health plan pros and cons, the predictability of costs and potential for refunds are appealing, the administrative burden and the financial risks associated with unexpected claims or regulatory changes can be significant. Businesses must weigh these factors carefully and consider whether they have the resources needed to manage these tasks effectively or if they need to seek external help from experienced administrators or consultants. As we explore further, understanding the potential risks and limitations of level-funded plans will also be crucial in making an informed decision.
Conclusion
As we’ve explored the intricacies of level funded health plan pros and cons, it’s clear that while they offer predictability and potential cost savings, they also come with their own set of challenges and risks. At NPA Benefits, we understand the complexities involved in choosing the right health insurance plan for your business. That’s why we offer a range of flexible health insurance options designed to give you the control you need while minimizing the disadvantages of level funding.
Our services are tailored to help businesses navigate the often complex landscape of health insurance with greater ease and confidence. We believe in empowering you with the tools and knowledge necessary to make informed decisions that best suit your company’s needs and goals. Whether you’re drawn to the cost control benefits of level-funded plans or you’re looking for more traditional options, our team is here to guide you through each step.
Why Choose NPA Benefits?
– Expert Guidance: Our experienced professionals are well-versed in the nuances of various health plan models, including level-funded plans. We’re here to help you understand each option’s potential benefits and drawbacks.
– Customizable Solutions: We recognize that no two businesses are alike. That’s why we offer customizable health insurance solutions that can be tailored to meet the specific needs of your workforce.
– Control and Flexibility: We provide options that enhance your control over healthcare costs while offering the flexibility to adjust as your business evolves and as regulations change.
To discover more about how NPA Benefits can assist you in finding the right health insurance solution, visit our health insurance benefits service page. Let us help you achieve a balance between cost efficiency and comprehensive coverage, ensuring your staff remains healthy and your business thrives.
