Self-Funded Health Plans

Health benefits play a critical role in attracting and retaining top talent. For small businesses and startups, managing these benefits efficiently is vital. Employers in the U.S. provide health insurance to over one-third of the population (157 million people), and 65% of those covered have self-funded plans. Yet, many business owners are unfamiliar with this option and its advantages.

If your startup or business is facing rising premiums or offering employee health coverage for the first time, transitioning to a self-funded health plan could help you reduce costs and increase flexibility. Understanding the basics of self-funding, its cost-saving potential, and how it compares to traditional insurance is essential before making the switch.

What Is a Self-Funded Plan?

In a self-funded plan, your business assumes the financial responsibility for employee healthcare costs rather than paying fixed premiums to an insurance carrier. You set aside funds—often in a medical trust—using contributions from your company and employees. Claims are paid directly from this reserve, giving you greater control over costs.

A related option, level-funded plans, combines the predictability of traditional insurance with the cost savings of self-funding. Employers pay a fixed monthly amount that covers estimated claims, stop-loss insurance (to protect against excessive costs), and administrative fees. Any surplus at the year’s end is refunded to the employer, unlike traditional plans where the insurance carrier retains any unused funds.

How Self-Funded Plans Differ from Fully-Funded Plans

In traditional fully-funded plans, an insurance carrier assumes all risks. Employers pay a fixed monthly premium, regardless of claims, and the carrier manages the policy. However, these plans often come with limited transparency, high administrative fees, and annual premium increases—even if claims are low.

In contrast, self-funded plans allow businesses to:

• Control Costs: Only pay for actual claims, not inflated estimates or carrier profit margins.
• Customize Coverage: Tailor plans and networks to meet employee needs.
• Retain Surplus: Any unused funds stay with your business, potentially reducing future contributions or expanding benefits.

Why Self-Funded Plans Appeal to Small Businesses

For startups and small businesses, self-funded plans provide flexibility, savings, and the ability to design benefits that align with their unique workforce needs. Key advantages include:

• Pay-As-You-Go Flexibility: Claims are reimbursed monthly based on actual usage, avoiding large upfront payments.
• Customizable Coverage: Choose networks and benefits tailored to your employees, with the ability to track claims and adjust coverage based on data.
• Potential Savings: Surplus funds can earn interest or be reinvested in wellness programs, benefiting both the employer and employees.
• Tax Savings: Self-funded plans are exempt from certain federal and state taxes applied to traditional insurance.

Risks and Considerations for Self-Funded Plans

While self-funded plans offer numerous benefits, they also carry certain risks, particularly for small businesses or startups with limited budgets. Catastrophic claims can quickly deplete your reserve fund, making stop-loss insurance essential.

Stop-loss coverage comes in two forms:

1. Individual Stop-Loss (ISL): Reimburses claims exceeding a set limit for any single employee.
2. Aggregate Stop-Loss: Protects against total claims surpassing a predetermined cap for your entire workforce.

Before switching to self-funding, assess factors such as your employee demographics, claim history, and location-specific healthcare costs. Many modern carriers and third-party administrators (TPAs) specialize in creating self-funded plans tailored for smaller businesses, offering flexibility and affordability.

Compliance and Administrative Requirements

Self-funded plans operate under federal laws like the Employee Retirement Income Security Act (ERISA), which exempts them from many state insurance regulations. However, businesses must comply with fiduciary responsibilities and federal requirements, such as appointing trustees to manage funds.

Unlike traditional insurers, modern self-funded providers simplify the quoting and enrollment process. For example, instead of lengthy health questionnaires, you’ll typically need:

• Employee census data (e.g., names, dates of birth, ZIP codes, and genders).
• Basic business information (e.g., company name, contact details, and workforce size).

This streamlined approach makes it easier for small businesses to transition to self-funded plans without unnecessary administrative burdens.

Why Partnering with the Right Carrier Matters

The transition to a self-funded health plan can feel overwhelming, especially for startups or small businesses with limited resources. By partnering with a trusted TPA or self-insurance carrier, you can simplify the process and ensure your plan meets your unique needs.

Expert providers can assist with:

• Designing a plan tailored to your workforce.
• Managing claims efficiently.
• Offering stop-loss protection to mitigate financial risks.

Switch to Self-Funded Health Plans Today

For startups and small businesses looking to save costs and gain greater control over employee health benefits, self-funded health plans offer a compelling solution. With the right partner and a clear understanding of your options, you can create a plan that benefits your business and your employees alike.

Get in touch with us to find an employee benefits plan that helps your business grow while keeping your health coverage costs down.