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Rather than pay for a fully-insured plan, an employer sets up a self-insured plan, using an insurer's premium calculations. These premium costs, rather than being paid outright to an insurer, are escrowed into a reserve fund for payment of claims. The premium dollars escrowed 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, based on morbidity which cannot be accurately estimated, carry-forward of the reserve amount is critical. The employer can earn income, in the form of tax-free interest, on the funds set aside in trust. The funds in the trust remain an asset of the employer, rather than profit for an insurer.

Stop Loss insurance is arranged to protect the plan against untoward losses. The amount of risk to be insured will be a function of many factors, including the employers size, nature of business, location, benefit plan, financial resources, profitability, prior experience, to name a few.

The plan document is prepared, which contains all the provisions of the plan, including eligibility, coverage, and termination. Employee benefit descriptions, identification cards and other materials necessary to operate the plan are also prepared, typically by the third party administrator (TPA). The TPA operates the plan, which includes 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 and the employer or insurer, and developing any required information for government reporting. The TPA also bills and collects premiums and other administrative fees for the plan. [back] [next]