Level-funded plans

How Level-Funded Plans Work

Level-funded health plans, a hybrid between fully funded and self-funded plans, are growing in popularity for small- and medium-sized businesses. These plans can provide employers substantial savings along with more flexibility. And, if a company keeps claims below a pre-determined threshold, they may see a refund when they renew.


Types of employee health plans

Healthcare insurance plans fall into three categories:

  1. Fully-funded plans – the most expensive choice because the insurance company bears the risk and no refunds
  2. Self-funded plans – the employer takes on the full financial responsibility of the insurance potential savings and/or claim costs
  3. Level-funded plans – considered a hybrid approach. The employer still pays a monthly premium, but the stop-loss policy protects them against any catastrophic claims. At the end of the year, if claims are kept at a minimum, the employer may receive a refund.


Why are small- to medium-sized businesses choosing level-funded (or mini self-funded) insurance plans?

A 2017 study by the United Benefit Advisors found that self-funded insurance plans are growing in popularity. For many large companies, with over 1,000 employees, self-funded plans have long been a preferred choice. However, small and medium-sized businesses are now joining their ranks.

The survey found that self-funding grew 48 percent for companies with 25 to 49 employees or 5.8 percent of all benefit plans. The percentage is even higher (13.4 percent) for companies with 50 to 99 employees. What is the root cause of this growth? Primarily, insurance costs. Level-funded plans provide employers with more flexibility, control, and potential savings, that is equally split between the carrier and the employer.


How do level-funded plans work?

A level-funded plan works in a very similar way to a fully insured plan; however, it allows employers to achieve the cost savings found in self-funded plans.  Like a fully funded plan, the employer contracts with an insurer and agrees to pay a pre-determined monthly premium, which is generally shared between employer and employee. The premiums are based on three components:  the anticipated claims allowance, the cost of a stop-loss insurance policy, and administrative fees. An Insurance Carrier or Third-Party Administrator (TPA) manages the claims and provides the stop-loss policy to handle any catastrophic personal or group expenses.


How are significant or catastrophic claims handled?

To insure against the financial burden of a large insurance claim, level-funded plans provide a stop-loss insurance policy.  This policy covers any expenses above a pre-determined amount for individual member claims, as well as group claims. The Insurance Carrier or TPA, sets stop-loss limits for individual employees as well as an aggregate for the entire business. Once claims reach these dollar thresholds, the stop-loss policy kicks in.


How are these plans administered?

Most small- to medium-sized companies use a Third-party Administrator, or TPA, either retained by the employer or provided by the carrier, to maintain and manage the fund and employee claims throughout the year. The TPA will also help secure stop-loss insurance coverage and will handle the administration and payment of claims. 


Can an employer save money with a level-funded plan?

The answer is yes, and savings can be realized in several ways. First, if your employees are healthy and file few claims within the year, the plan contributions will create a surplus for the employer.

Second, if the claims for that year fall below the amount that is established with the Insurance Carrier or TPA, the business may receive a rebate at renewal time. Also, self-insured and level-funded plans are exempt from the ACA’s medical excise tax as well as local state taxes. They still must pay to fund the federal Patient-Centered Outcomes Research Institute (PCORI), however this fee will be phased out after the final July 2020 payment.


What are the compliance requirements?

Like self-funded insurance plans, level-funded plans fall under all applicable federal laws including, ERISA (Employee Retirement Income Security Act), HIPAA (Health insurance Portability and Accountability Act), as well as several anti-discrimination laws including the ADA.   



Are they a good fit for your business?

Level-funded insurance plans can be a cost-saving alternative for small to medium-sized businesses; however, there are some important considerations to keep in mind. 


These plans work best for employers with a healthy workforce. If your company exceeds the amount of the estimated claims, you could be in for a significant bump in your renewal premiums. The fall back of using the ACA will still be available by simply returning to a “Traditional” plan. However, since the potential refund from the level- funded plans isn’t paid out until the 15th month following your renewal, you will lose the refund.

And, level-funded plans require preparation. Plan documents like the Summary of Benefits and Coverage (SBC) and Summary Plan Description (SPD) will need to be prepared along with any applicable federal government paperwork. Lastly, a stop-loss insurance policy will need to be secured. All of which is supplied by the offering level-funded carrier.


If your company is interested in exploring the option of a level-funded insurance plan, turn to The Kirwan Companies for help. Our consultants are ready to help you take control of your healthcare insurance costs while still delivering the best possible coverage for your employees.

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