Nov 30, 2023Decoding Healthcare Jargon: A Simple Guide to Insurance Terms
Use this simple guide to insurance terms and understand the jargon in your benefits plan with confidence. Our advisors are here to help.
A health insurance plan has two basic funding platforms: fully-insured and self-funded. Under a fully-insured platform, the plan sponsor (the employer that operates the plan) pays the insurance carrier a fixed monthly amount to cover the plan’s premiums; thereafter, the insurance carrier pays the cost of the covered services under plan. By contrast, under a self-funded platform, the plan sponsor itself pays most of the cost of the plan’s covered services. Self-funding “premiums” are fixed; however, the ultimate cost to the plan sponsor can vary greatly month-over-month, due to fluctuating claims by the plan’s participants.
In recent years, some plan sponsors have chosen to switch funding platforms from fully-insured to level-funded. Level-funding is a specialized form of self-funding that may appeal to small or mid-sized employers. In this article we will discuss the basics of how a level-funded plan is viewed under the law, as well as the additional reporting and payment responsibilities that employers will have after the switch.
Self-funded plan where the plan sponsor pays a fixed monthly payment to cover costs of administration, claims, and stop loss premiums.
One of the most common sources of compliance errors for level-funded plans is that the plan sponsor forgets the plan is considered self-insured. This is not surprising given that level-funded plans are often deliberately designed to “look and feel” like fully-insured plans. This problem is compounded by the fact that level-funded plans are used most often with small group employers who historically always had fully-insured plans and are likely not as familiar with the unique rules applicable to self-insured plans. Thus, it is important when implementing a level-funded plan to reiterate to the plan sponsor that:
A level-funded plan sponsor is required to pay the PCORI fee each year. Occasionally, the level-funded plan vendor may include the PCORI fee in the monthly payment amount and submit the payment to the IRS on the plan sponsor’s behalf. However, the PCORI fee rules make clear that it is the plan sponsor who is liable for the PCORI fee, not the plan, so wrapping the PCORI fee into the monthly payment amounts, which may be paid in part by employee contributions, is problematic. Accordingly, in most cases, the level-funded plan sponsor is responsible for reporting and paying the PCORI fee each year. See our PCORI Fee Summary for more information on paying the PCORI fee.
Because it is self-funded, a level-funded plan sponsor is required to complete ACA reporting under IRC §6055, reporting all individuals enrolled in self-funded coverage. A plan sponsor who is also an applicable large employer (ALE) will complete this reporting on Part III of Form 1095-C. A plan sponsor who is not an ALE will complete the reporting using Form 1095-B. Again, occasionally the level-funded plan vendor will do this reporting on the plan sponsor’s behalf; but, more often than not the employer is responsible for completing this reporting.
Fully-insured plans must comply with state insurance mandates and rules. On the other hand, self-insured plans are not subject to state insurance mandates because of ERISA preemption. Since a level-funded plan is self-funded, that means it does not have to comply with these state insurance mandates. This may allow the level-funded plan to avoid covering certain procedures mandated by state law (e.g. cochlear implants, ABA therapy for autism spectrum disorder); not have to comply with state minimum employer contribution rules; and/or disregard state continuation rules (see below).
Having said that; as noted above, many level-funded plans are intentionally designed to mimic fully-insured products, so it is possible the vendor may include certain coverage(s) mandated by state insurance laws in its level-funded products even though it is not required to do so. Plan sponsors should not assume that coverage required by state law is included in their level-funded plan; but nor should they assume it is not. Rather they need to carefully review the plan documents if there is any question whether a particular state insurance requirement is included in their level-funded plan.
Note that government employers and churches are not subject to ERISA and thus do not benefit from ERISA preemption. That does not necessarily mean that a church or government employer’s level-funded plan will have to comply with state insurance mandates, though, as those mandates are typically directed at the content of insurance policies, which the level funded plan is not. Again, church and government employers should not assume their level-funded plans do or do not include state insurance mandates; however, they should discuss their special status with their level-funded vendor to understand what their plans must cover.
As noted above, as a self-funded plan, a level-funded plan is not subject to state continuation rules, unless the level-funded plan vendor has deliberately incorporated those rules into the plan document. Moreover, federal COBRA does not apply to employers with less than 20 employees on a typical business day in the preceding calendar year. Thus for small employers with level-funded plans there are often no continuation rights available to participants at all and employers must be careful not to offer continuation that doesn’t actually exist. (Level-funded plans offered by employers with more than 20 employees, other than churches, will still be subject to federal COBRA even though state continuation does not apply.)
Assuming federal COBRA applies, the rules for determining the COBRA premiums are different for self-funded plans compared to fully-insured plans. For a self-funded plan the COBRA premium is either a reasonable estimate of the cost of providing coverage, determined on an actuarial basis, for the current plan year; or the cost to the plan of providing coverage in the preceding plan year, provided the plan design has not significantly changed in the current plan year.
Of particular relevance to a level-funded plan, the fixed monthly cost the employer pays the vendor is typically calculated based on the plan’s maximum liability, not its expected liability. That means in most cases the plan sponsor cannot simply use the monthly fixed payment as the basis for the COBRA premiums; rather, they must set the COBRA premiums based on expected claims (if provided by the level-funded plan vendor) or last year’s total costs, taking into account any refund the employer received at year end based on the plan’s performance.
The HIPAA Privacy and Security rules allow fully-insured plans to potentially avoid many HIPAA Privacy and Security obligations, depending on whether the plan sponsor is “hands-off” (the plan sponsor only receives enrollment or disenrollment and summary health information), or “hands-on” (the plan sponsor receives more detailed protected health information, or PHI).
While sponsors of level-funded plans will typically have similarly limited access to PHI in connection with their plan, the ability to disregard certain HIPAA rules is specifically limited to hands-off fully-insured plans. Since a level-funded plan is self-funded, this means a level-funded plan must technically comply with the full set of HIPAA Privacy and Security rules.
The good news is that the HIPAA rules allow the plan to tailor their HIPAA Privacy and Security policies and procedures to the specific PHI to which the plan has access. Since that will typically be very limited, the policies and procedures in most cases can be relatively brief. Nevertheless, there are certain obligations that must be completed including appointing a HIPAA Privacy Officer, distributing a Notice of Privacy Practices to plan participants, completing a security risk assessment to determine what electronic PHI (ePHI) the plan has access to, and developing appropriate policies and procedures to protect that PHI.
Under ERISA, employee contributions and any funds that can be traced to those contributions are plan assets that must be used for the exclusive benefit of plan participants; these funds cannot simply be retained by the employer (nor used for any non-plan-related business purpose). Thus, to the extent that employees contributed towards the cost of the level-funded plan, the employer must determine whether any portion of the year end refund is attributable to those employee contributions. If so, that portion of the refund attributable to the employee contributions are plan assets that must be used for the exclusive benefit of plan participants.
If the plan document contains language specifically addressing ownership of the year end refunds or describes a method or formula for allocation of the refund between employer and employees then that language will control. In the absence of such language, we believe it is reasonable to rely on the MLR rebate guidance to allocate the refund between employer and employee contributions. For example, if over the course of the year the employee contributions amounted to 25% of the fixed monthly payments and the employer paid the remaining 75% of those payments and the employer received a year end refund based on plan performance of $10,000, $7,500 of that refund would belong to the employer to do with as they see fit and the remaining 25% would be plan assets that must be used exclusively for the benefit of the plan’s participants.
Options for using the employee portion of the refund include returning the funds to employees as taxable wages; giving a premium holiday on upcoming employee contributions; or using the funds to upgrade the plan to provide better coverage, e.g. by implementing a wellness program. Plan sponsors are not required to go back and identify the specific employees enrolled on the plan during the year which generated the refund or allocate the employee share in direct proportion to the amount contributed by each individual employee. Rather, the Department of Labor has indicated that plan sponsors can use the funds for the benefit of current plan participants and divide it equally among them or use any other fair and equitable apportionment method.
Self-funded plans, including level-funded plans, are subject to Internal Revenue Code §105(h) non-discrimination testing, which prohibits the plan from discriminating in favor of highly compensated individuals (HCIs). HCIs for this purpose includes the highest paid 25% of all employees so every employer by definition will have HCIs.
While the details of §105(h) nondiscrimination testing are beyond the scope of this guide, plan designs that may raise red flags include owners and executives who are provided coverage at no charge while other employees must make a contribution; eligibility rules that deny coverage to significant numbers of lower paid employees; or different waiting periods for managers vs. line employees. If a plan fails one (or more) factors of the nondiscrimination testing, the highly compensated individuals will lose the tax-favored benefit of the plan and must be taxed on the some or all of the value of the plan.
Typically, the Premium-Only/IRC Section 125 Plan third-party administrator itself will perform the nondiscrimination testing for an additional fee. Should your TPA not offer this service, please contact our office for a referral.
The sponsors of self-funded plans are responsible for ensuring their plans complete the prescription drug reporting required by the transparency in coverage provisions of the ACA and CAA 2021. The first reports were due December 27, 2022 for the years 2020 and 2021; subsequent reports are due by June 1 for the preceding calendar year.
As a practical matter, the plan’s TPA and/or Pharmacy Benefit Manager will have to prepare the substantive portions of the reports; however, every TPA and PBM is handling the filing differently. Some TPAs will file everything on behalf of the plan; others require the plan sponsor to file a portion of the reports themselves (namely the so-called P2 and D1 files) while they file the substantive files. Still other TPAs will merely provide the plan sponsor with the necessary data and leave it up to them to do all of the actual filing. Level-funded plan sponsors should verify with their TPA what their responsibility will be with respect to this reporting.
¹We are aware of some carriers in certain markets offering fully-insured plans that they are referring to as level-funded plans. The discussions in this article that hinge on the self-funded nature of level-funded plans would not apply to such a plan design; therefore, it is important to make sure you understand the nature and funding mechanism of your specific plan.
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