How Self Funding Works
Instead of a fully-insured plan, an employer sets up a self-insured plan:
- premiums are placed in a reserve for claims payment
- These premiums remain the property of the employer!
- If claims fall below the reserve amount, the plan is considered to be 'in the black' for that year and the over funded reserve is carried forward.
Since claims are cyclical, carry-forward of the reserve amount is critical. The employer can earn tax-free income on the funds set aside in trust, which remain an asset of the employer, rather than profit for an insurer.
Stop loss insurance is arranged to protect the plan from catastrophic claims. The amount of risk to be insured will be a function of many factors:
- employer's size
- nature of business
- location
- benefit plan
- financial resources
- profitability
- prior experience, and so on
The plan document is prepared, which contains all the provisions of the plan:
- eligibility, coverage, and termination.
- Employee benefit descriptions, identification cards and other materials necessary to operate the plan.
A third-party administrator (TPA) operates the plan, including:
- claims review and settlement
- maintaining proper funds on deposit so that claims can be paid
- preparing special forms or reports and other required data for the plan, the employer or insurer
- developing any required information for government reporting.
- The TPA also bills and collects premiums and other administrative fees for the plan.
