Funding Your Health Plan
Author: From our expert member in Talent Management and HR – RRC RESOURCES
Do you find yourself debating if you should be offering health plans to your employees? That should be a resounding yes…here’s why.
Having health Insurance plans for your employees will increase the likelihood that they are proactive about their health. If insurance isn’t available, they may not take advantage of annual physicals and other regular check-ins. If employees do not address their health proactively, they may be more likely to end up missing work for extended periods of time due to a serious illness and/or other health condition.
The next question you may be asking yourself is, “what is the best way to fund the health plan I offer to my employees?”. There are a variety of mechanisms available to fund health insurance programs. Below is a summary of the basic concepts involved in each type of funding and the pros and cons of each type.
Traditional Insurance:
The most familiar funding design is the “fully insured” plan. In this design, the employer pays a premium to an insurance carrier each month and in return, the carrier pays eligible claims. The premium represents the carrier’s expenses for doing business and claims and reserves for future claims. This type is easy to budget because the employer is dealing with a level of guaranteed cost. A major weakness of this type of the inherent loss of financial control. Since the company is pre-paying future claims, it is unable to take advantage of cash flow nor is the company able to earn interest on money that is sitting in reserves for future insurance claims.
Funding Your Health Plan
Minimum Premium Plans:
One way to take advantage of this cash-flow, while still maintaining the security offered in traditionally funded plans is using a partially self-funded or “minimum premium” plan. These types of plans combine the limited liability of a fully insured plan with the improved cash flow and reduced premium tax of a self-funded plan. The employer pays the insurance carrier a smaller monthly premium for the administrative and insurance expenses while funding the claims as they are paid until a certain maximum is reached. If all the money isn’t needed, the employer can earn interest on the money not needed for the claim. If an additional amount is needed for the claim, the insurer pays the additional amount until there are extra funds available to pay in the future. This type of plan is particularly effective in its first year. The renewal increase will be more substantial in the second year and future years.
Self-Insured Plans:
At the other end of the spectrum, are self-funded plans. These are appropriate for employers with over 100 employees. Here, the employer is responsible for all the claims and holds the reserves for expected claims. Claims are paid directly from corporate assets or via a funded trust. Here, the employer is responsible for all the claims and holds the reserves for expected claims. Claims are paid directly from corporate assets or via a funded trust. Employers utilize this concept to improve cash flow, save premium taxes, increase freedom of plan design, and maintain tighter financial and administrative control over their programs. Some advantages are that you only pay for benefits that were utilized. The employer holds part of the reserve and can invest it to earn additional money. Some disadvantages are that plan costs can fluctuate. Employers must make sure the reserve is sufficient to pay termination costs if the plan is canceled.
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