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Choosing Short Term Disability: Fully Insured or Self Insured?

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Choosing Short Term Disability: Fully Insured or Self Insured?

The Financial Insights Behind Fully Insured vs Self Insured Short Term Disability

When exploring fully insured vs self insured short term disability, it’s crucial to understand the quick differences:

  • Fully insured STD pays a fixed monthly premium for all employees, regardless of usage.
  • Self insured STD means employers pay claims as they occur, often saving money long term if claims are lower than premiums.

Navigating the landscape of short-term disability (STD) coverage can be challenging for businesses trying to balance cost control and employee well-being. With rising healthcare costs, choosing the right disability plan is more significant than ever.

Fully insured STD plans involve paying fixed premiums to an insurance carrier, which assumes the risk and manages claim payouts. This offers predictability but can be costly when premiums rise due to high usage.

Self insured STD plans, on the other hand, allow employers to pay disability benefits directly as claims happen. This can result in substantial savings over time, especially during low-claim periods. However, it also means taking on the financial risk and administrative responsibilities.

Many companies face the dilemma of selecting a plan that manages costs while still providing robust employee benefits. It is here where expert advice becomes indispensable in evaluating the pros and cons of each option.

“Employer provided Short-Term Disability benefits typically provide employees a percentage of their salary while they are temporarily disabled…” – SHRM’s 2016 Employee Benefits Survey

With over 40 years of experience, NPA Benefits specializes in helping businesses navigate these complex choices. Our goal is to ensure employers not only save money but also maintain competitive benefits that attract and retain valuable employees.

I’m Les Perlson, an experienced partner in the insurance industry, specializing in fully insured vs self insured short term disability plans. My background includes designing employee benefits and managing the risks associated with self-funded plans.

Now, let’s dive deeper into understanding what short-term disability insurance entails.

fully insured vs self insured short term disability plans comparison infographic - fully insured vs self insured short term disability infographic comparison-2-items-casual

What is Short Term Disability Insurance?

Short Term Disability (STD) insurance is a benefit that provides employees with income replacement if they are temporarily unable to work due to a non-work-related injury or illness. This type of insurance ensures that employees can still receive a portion of their salary while they recover and are unable to perform their job duties.

Definition and Purpose

Short Term Disability insurance is designed to support employees during periods when they cannot work due to medical conditions such as surgery recovery, injuries from accidents, or complications from pregnancy. The primary purpose of STD insurance is to offer financial stability to employees when they face short-term health issues, preventing them from experiencing severe financial hardship during their recovery period.

Coverage

Typically, STD insurance covers between 40-70% of an employee’s salary, depending on the policy. The duration of coverage can range from a few weeks up to a year, depending on the terms of the plan. For example, a common STD policy might provide 60% of an employee’s usual pay for up to 12 weeks.

To receive benefits, employees must provide medical documentation proving their inability to work. Qualifying conditions might include:

  • Surgery rehabilitation
  • Injury from an accident
  • Complications from pregnancy

Employee Benefits

Offering STD insurance can be a significant advantage for both employees and employers. Here are some key benefits:

  • Financial Security: Employees receive a portion of their income, reducing the financial stress during their recovery.
  • Peace of Mind: Knowing they have coverage helps employees focus on recovery without worrying about lost wages.
  • Employee Retention: Companies that offer STD insurance are seen as caring and supportive, which can increase employee loyalty and retention.
  • Attract Talent: Competitive benefits packages, including STD insurance, can help attract top talent to your organization.

In fact, according to SHRM’s 2016 Employee Benefits survey, 70% of employers provide company-paid STD benefits to their employees, reflecting its importance in comprehensive employee benefits packages.

employee benefits - fully insured vs self insured short term disability

Real-World Example

Consider a mid-sized company with 200 employees. They had been purchasing STD insurance from a reputable carrier, paying monthly premiums for all employees. After analyzing their claims history, they realized that only a small percentage of employees actually used the benefit each year. By switching to self-insured STD, they saved on premium costs and had more control over the funds, which could be reallocated to other employee benefits or company initiatives.

This example illustrates how understanding and implementing the right type of STD insurance can lead to significant cost savings and enhanced employee satisfaction.

Next, we’ll delve into the specifics of fully insured short term disability plans and their advantages.

Fully Insured Short Term Disability

Fully insured short term disability (STD) plans are a popular choice among employers. These plans involve paying a fixed premium to an insurance carrier, which then handles all employee claims and payments. Let’s explore their advantages and disadvantages.

Advantages of Fully Insured Plans

Fixed Premiums and Predictability

One major benefit of fully insured STD plans is financial predictability. Employers pay a fixed premium each month, making budgeting simpler and more straightforward. According to SHRM’s 2016 Employee Benefits survey, 70% of employers provide company-paid STD benefits, highlighting the popularity of this predictable expense.

Reputable Carrier and Safety

Choosing a reputable insurance carrier ensures that claims are handled professionally and efficiently. This reduces the risk of financial instability for the employer, as the insurance company assumes all claim-related risks.

No Administrative Burden

With fully insured plans, the insurance company takes care of all administrative tasks. This includes processing claims, managing compliance, and dealing with paperwork. This allows employers to focus on their core business activities without worrying about the complexities of managing disability claims.

Tax-Deductible Premiums

Premiums paid for fully insured STD plans are often tax-deductible. This can provide a financial advantage, helping to offset some of the costs associated with providing these benefits.

Disadvantages of Fully Insured Plans

Higher Costs

Fully insured plans can be more expensive. Employers pay premiums that cover not only the expected claims but also administrative fees and the insurance company’s profit margin. Over time, these costs can add up, especially if the company’s actual claims are lower than expected.

Lack of Flexibility

Fully insured plans are typically less flexible. Employers must choose from pre-designed plans offered by the insurance carrier, which may not fully meet the unique needs of their workforce.

Annual Renegotiation and Potential Rate Hikes

Each year, insurance premiums are subject to renegotiation. If there has been a high volume of claims, employers may face double-digit premium increases in the following year. This can lead to budgetary challenges and financial uncertainty.

Next, we’ll look at the advantages and disadvantages of self insured short term disability plans.

Self Insured Short Term Disability

Self insured short term disability plans offer a different approach compared to fully insured plans. Instead of paying fixed premiums to an insurance carrier, employers take on the responsibility of covering disability benefits directly. This can provide several advantages but also comes with its own set of challenges.

Advantages of Self Insured Plans

Cost Savings

One of the most significant benefits of self insured plans is the potential for cost savings. Employers only pay for actual claims, not a fixed premium for all employees. This can lead to substantial savings, especially if the number of claims is low. For example, if an employer budgets for an employee’s full salary, but only pays 60% during a disability period, the difference can be a direct saving.

Plan Customization

Self insured plans offer greater flexibility in plan design. Employers can tailor the benefits to meet the specific needs of their workforce. This customization can increase employee satisfaction and retention. For instance, an employer might decide to offer higher benefits for certain conditions or extend the duration of benefits based on employee feedback.

Control Over Funds

Employers have complete control over the funds allocated for disability benefits. This means they can invest the funds and potentially earn interest, adding another layer of financial benefit. Unlike fully insured plans where surplus funds stay with the insurance company, self insured plans allow the employer to reinvest any unused funds back into the business or employee benefits.

Disadvantages of Self Insured Plans

Financial Risk

Taking on the financial risk is a significant downside. If there are more claims than expected, the costs can quickly add up. Employers might face severe financial strain if multiple employees become disabled at the same time. This unpredictability makes budgeting more challenging compared to the fixed costs of fully insured plans.

Administrative Responsibilities

Managing a self insured plan comes with increased administrative duties. Employers need to handle claims processing, compliance, and other related tasks. This often requires additional resources or hiring a third-party administrator (TPA), which can offset some of the cost savings.

Potential Cash Flow Issues

Self insured plans can create cash flow problems. Unlike fully insured plans where premiums are predictable, the costs of a self insured plan can vary month to month. Employers need to ensure they have sufficient funds available to cover any unexpected claims.

Claim Denial Challenges

Employers might face difficulties when denying claims. Unlike insurance companies that have established processes and experience in handling disputes, employers might lack the expertise. This can lead to legal challenges and potential conflicts with employees.

In summary, self insured short term disability plans offer flexibility and cost savings but come with financial risks and administrative burdens. Employers need to carefully weigh these factors when deciding which approach is best for their organization.

Next, we’ll compare the costs, risk management, administrative duties, and employee satisfaction between fully insured and self insured short term disability plans.

Comparing Fully Insured vs Self Insured Short Term Disability

Cost Considerations

When it comes to cost comparison between fully insured and self insured short term disability plans, there are several factors to consider.

Fully insured plans involve paying a fixed premium to an insurance carrier. This provides predictability in budgeting but can be more expensive over time. Premiums are fixed annually based on the number of enrolled employees, and any surplus remains with the insurance company.

On the other hand, self insured plans allow employers to pay claims directly, potentially leading to significant savings if claims are lower than expected. Employers only pay for actual claims, which can result in lower overall costs. However, this approach also means dealing with variable costs, which can fluctuate month-to-month, making budgeting more challenging.

Administrative fees are another consideration. Fully insured plans typically include these in the premium, while self insured plans may require additional costs for third-party administrators (TPAs) or software to handle claims.

Risk Management

Risk management is a critical aspect of choosing between fully insured and self insured short term disability plans.

With fully insured plans, the insurance carrier assumes all financial risk. This means employers are protected from unexpected high costs, such as catastrophic claims. This can be a safer option, especially for smaller companies with limited financial reserves.

In contrast, self insured plans place the financial risk on the employer. To mitigate this risk, many employers purchase stop-loss insurance. This coverage kicks in when claims exceed a certain threshold, protecting the employer from catastrophic losses. However, understanding the nuances of stop-loss policies is crucial, as misalignment with the medical plan can lead to denied coverage.

Administrative Duties

Administrative duties differ significantly between fully insured and self insured plans.

Fully insured plans relieve employers from the burden of claims processing, as the insurance company handles all administrative tasks. This includes compliance with regulations and dealing with disputes, which can be complex and time-consuming.

Self insured plans require employers to manage these tasks in-house or hire a TPA. This includes claims processing, compliance with regulations like ERISA and HIPAA, and maintaining sufficient software and staffing to handle the workload. While this allows for greater control, it also increases administrative responsibilities and costs.

Employee Satisfaction

Employee satisfaction is a key consideration in choosing between fully insured and self insured short term disability plans.

Fully insured plans often provide a sense of security to employees due to the involvement of a reputable insurance carrier. This can enhance employee retention and make the company more attractive to potential recruits.

Self insured plans offer greater benefit customization, allowing employers to tailor the plan to better meet their employees’ needs. This flexibility can lead to higher satisfaction among employees, as their specific needs are addressed more effectively. However, the potential for claim denial challenges and administrative mishaps can negatively impact satisfaction if not managed properly.

In conclusion, both fully insured and self insured short term disability plans have their pros and cons. Employers need to carefully evaluate their financial stability, risk tolerance, administrative capabilities, and employee needs to make the best decision for their organization.

Next, we’ll address some common questions about fully insured vs self insured short term disability.

Frequently Asked Questions about Fully Insured vs Self Insured Short Term Disability

What is the difference between fully insured and self insured short term disability?

A fully insured short term disability (STD) plan involves the employer paying a fixed premium to an insurance carrier. The carrier then covers the cost of any claims. This provides financial predictability but often comes at a higher cost. According to SHRM’s 2016 Employee Benefits survey, 70% of employers offer fully insured STD benefits, reflecting its popularity for its simplicity and risk mitigation.

In contrast, a self insured short term disability plan means the employer assumes the financial risk of covering claims. Instead of paying premiums, the employer sets aside funds to pay out claims directly to employees. This can lead to cost savings and more control over the plan but comes with higher financial risk and administrative responsibilities.

How do stop-loss insurance and advice to pay services work?

Stop-loss insurance helps manage the financial risk of self-insuring. It provides a safety net by capping the amount an employer has to pay for high-cost claims. For example, if an individual claim exceeds a predetermined amount, stop-loss insurance covers the excess. This is crucial for protecting against catastrophic claims that could otherwise be financially devastating.

Advice to pay services are an excellent way for employers to manage the administrative burden of self-insured plans without handling protected health information (PHI). Employers pay a fee to an insurance company to review and validate claims. This ensures that claims are handled professionally and comply with all regulations, without the employer directly accessing sensitive health information.

What factors should an employer consider when choosing between fully insured and self insured short term disability?

  1. Financial Stability: Can the company handle the variability in costs associated with self-insuring? Larger companies with stable cash flows might benefit more from self-insuring due to potential cost savings.

  2. Risk Tolerance: How much financial risk is the company willing to take on? Fully insured plans transfer most of the risk to the insurance carrier, while self-insured plans leave the risk with the employer.

  3. Administrative Capabilities: Does the company have the resources to manage claims internally, or will it need to hire third-party administrators? Self-insuring requires significant administrative effort.

  4. Employee Demographics and Health: How healthy is the employee pool? Companies with healthier employees might save more with self-insuring.

  5. Plan Customization: How important is flexibility in plan design? Self-insured plans offer more customization to fit specific employee needs.

By carefully considering these factors, employers can make an informed decision that aligns with their financial goals and employee needs.

Next, we’ll summarize the key points and provide guidance on making the best choice for your company.

Conclusion

Choosing the right type of Short Term Disability (STD) insurance is a critical decision for any employer. We’ve explored the key differences between fully insured vs self insured short term disability plans, highlighting their respective advantages and disadvantages.

Summary

Fully Insured Plans offer predictability, safety, and minimal administrative burden. However, they come with higher costs and less flexibility.

Self Insured Plans provide cost savings, plan customization, and control over funds. But they also carry financial risk, require significant administrative effort, and can lead to cash flow issues.

Decision Factors

When deciding between fully insured and self insured STD plans, consider:

  • Cost: Evaluate premium costs, administrative fees, and potential savings.
  • Risk Management: Assess your company’s financial stability and tolerance for risk.
  • Administrative Duties: Determine your capacity to handle claims processing and compliance.
  • Employee Satisfaction: Consider how plan customization could impact employee retention and recruitment.

NPA Benefits: Your Partner in Choosing the Right Plan

At NPA Benefits, we specialize in helping employers navigate the complexities of disability insurance. Our team can help you analyze costs, manage risks, and tailor plans to meet your unique needs.

Ready to make an informed choice? Learn more about the differences between fully insured and self insured plans and contact us for expert guidance.

Choosing the right STD insurance plan can significantly impact your organization’s financial health and employee satisfaction. Let us help you find the best solution for your company.

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