Retirement plan sponsors are the first, and most important, line of defense in providing employees with well-managed retirement savings plans.
Insurance
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3 min read
There’s no getting around it—navigating the ins and outs of health benefits is a complicated task for business owners. You are not only tasked with determining what type of health insurance plans to offer your employees—you also have to figure out the best funding strategy for your business.
There are many potential benefits to moving from a fully funded or traditional health insurance plan to a self-funded plan. In addition to enhanced cash flow, immediate savings can be realized by avoiding taxes and profit margins built into your premiums under a traditional fully-insured arrangement. Plan flexibility, customization, and utilization reporting are also greatly enhanced.
The pricing model is different for both plans, but you can remember them easily by comparing each funding option to some common utility bills!
In this blog post, we’ll cover the basics of fully funded and self-funded insurance models to help you determine which strategy is best for your business. We’ll also highlight the main difference between paying a fixed premium under a fully funded plan and the more flexible pricing of a self-funded plan using everyday utility bills.
Fully Funded vs. Self-Funded Plans
A fully funded (traditional) plan involves a fixed monthly premium paid to an insurance carrier. The carrier pays for healthcare claims, while employees and covered dependents pay any deductible amounts, co-payments, or co-insurance for those covered services.
A self-funded (self-insured) plan involves fixed monthly costs for items such as administrative fees and stop-loss coverage. A Third-Party Administrator (TPA) performs the tasks traditionally handled by the insurance company such as claims administration and billing.
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Fully Funded Insurance Plans |
Self-Funded Insurance Plans |
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Pricing Structure |
Monthly premiums are paid to insurance carrier |
No monthly premiums; employer pays: · Certain fixed costs, including administrative fees, and stop-loss insurance. · Variable costs of employee claims |
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Risk Assumption |
Insurance carrier assumes risk |
Employer assumes risk |
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Plan Structure |
Insurance carrier determines plan design and options |
Employers have more flexibility and control of plan design |
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Compliance |
Must adhere to all state regulations |
Must comply with ERISA, but not state regulations |
Using Common Utility Bills to Explain Fully and Self-Funded Insurance Models
Paying the fixed premium for a fully funded insurance plan is like paying for cable TV service. It doesn’t matter if you watch five or 500 hours of TV—you still pay the same amount each week. A self-funded plan functions more like an electric bill, which has some fixed costs, but the majority of your payment will depend on how much energy you consume each month.
With a fully funded plan, you pay a monthly premium to the insurance carrier. The premium rates are fixed for a year, based on the number of employees enrolled in the plan each month. This is like paying a mortgage or rent payment—the cost of your payment is fixed for the year. In a self-funded model, healthcare claims are funded by the employer and costs vary from month to month based on the services utilized. So, it’s more like paying a water bill that varies each month based on how much you use.
If you want unlimited texting, you can pay a flat monthly fee to cover it. This is similar to paying a monthly premium to your insurance carrier under a fully funded plan. If you go over your internet data usage for the month, carriers will allow you to purchase additional data, so the cost varies depending on how much data you use each month. Self-funded plans offer similar flexibility.
Deciding whether to fully insure or self-insure your health benefits program is a major, long-term business directive. You should analyze your choices completely and understand the calculated risks involved with each funding strategy. Our expert employee benefits brokers can help you determine what’s best for your company.
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