Level-funded health plans are now growing and giving businesses more control over costs while still providing valuable benefits.
A level-funded health plan is a type of employer-sponsored insurance that combines the cost control of a self-funded plan with the predictability of fully insured plans. Employers make fixed monthly payments, which cover administrative costs, stop-loss insurance, and expected claims. If claims are lower than expected, companies may receive year-end refunds, creating potential cost savings compared to traditional plans.
Businesses need to stay on top of state insurance laws, ERISA compliance, ACA reporting, COBRA rules, and other legal requirements to avoid penalties and protect their employees.
Legal and Compliance Considerations While Setting Up Your Level-Funded Plan
Before rolling out, it’s important to understand the legal and compliance considerations for level-funded insurance. Unlike traditional fully insured plans, level-funded plans operate under a mix of state and federal regulations, making compliance a bit tricky.
ERISA Preemption
A level-funded plan falls under ERISA (Employee Retirement Income Security Act) rather than state insurance mandates. This means level-funded insurance is not required to follow state-specific laws that typically apply to fully insured plans.
For example, ERISA preemption allows self-funded plans, including level-funded benefits, to:
- Avoid covering certain state-mandated procedures (e.g., specific autism therapies or fertility treatments).
- Skip state-mandated minimum employer contributions toward premiums.
- Disregard state continuation rules (which govern coverage extensions for former employees).
That said, many level-funded plan vendors design their offerings to closely resemble fully insured plans. Some vendors voluntarily include state-required benefits, even when they’re not required to do so. Employers should carefully review their plan documents to understand what is covered and ensure compliance with both federal and state regulations.
Nondiscrimination Testing
To maintain tax-favored benefits, level-funded plans must pass nondiscrimination testing, which ensures that health benefits are not disproportionately favoring highly compensated employees (HCIs). Under IRS Code Section 105(h), a self-funded plan (including level-funded insurance) must provide fair access to all employees.
If a level-funded health plan fails this test, highly compensated employees may have to report excess benefits as taxable income, which can lead to compliance issues and financial headaches.
PCORI Fees
If you’re offering a level-funded health plan, your business is responsible for paying the Patient-Centered Outcomes Research Institute (PCORI) fee. This federal fee helps fund research on healthcare effectiveness and applies to self-funded plans, including level-funded insurance. This means:
- The level-funded plan sponsor (employer) is typically responsible for reporting and paying the PCORI fee annually.
- Some level-funded providers may include the fee in monthly payments and handle IRS submissions, but this isn’t always the case.
- If the PCORI fee is included in employee contributions, it may lead to compliance issues, so employers should verify with their provider.
If you work with a broker or third-party administrator (TPA), they will handle the reporting and administration for you. TPAs will guide you through the compliance process, ensuring all fees are accounted for correctly and submitted on time—so you don’t have to stress about the details.
Ongoing Compliance Requirements: During the Plan Year
Once your level-funded health plan is in place, compliance doesn’t stop. Employers must keep up with annual reporting, continuation coverage rules, and premium calculations to stay compliant with federal regulations.
ACA Reporting
Many businesses transitioning to a level-funded health plan don’t realize that Affordable Care Act reporting may now be required—even if they weren’t responsible for it before. Since level-funded insurance resembles self-funded, employers must comply with IRS reporting rules to verify that they provided minimum essential coverage to employees.
For businesses with fewer than 50 full-time employees, this means filing Form 1095-B under Internal Revenue Code (IRC) 6055. If your company is classified as an Applicable Large Employer (ALE) with 50 or more full-time employees, you’ll need to complete this reporting in Part III of Form 1095-C.
COBRA:
If an employee leaves your company, they may wonder whether they can continue their health coverage under COBRA. However, the rules around COBRA coverage for level-funded benefits depend on the size of your business and how your plan is structured.
I. COBRA and State Continuation
COBRA applies only to businesses with 20 or more employees on a typical business day in the previous calendar year. If your company falls below that threshold, COBRA does not apply, and employees may not have the right to continue their coverage unless state continuation laws are included in your plan.
Since level-funded plans are not subject to state continuation laws unless the insurance carrier includes them, employers should check their plan documents to confirm whether continuation coverage is available.
II. COBRA Premiums
If COBRA applies to your business, setting the right COBRA premium for a level-funded health plan is different from a fully insured plan. The monthly fixed payment you make to the vendor cannot automatically be used as the COBRA premium since it is based on the plan’s maximum liability, not actual expected claims.
Instead, the premium must be calculated based on either expected claims for the current year (if the vendor provides this) or the total cost of the previous year’s coverage, factoring in any year-end refunds.
Having a third-party administrator (TPA) ensures your COBRA premiums are set correctly. Miscalculating rates can lead to financial risks, including undercharging or overcharging former employees.
Prescription Drug Data Collection Reporting
One compliance requirement that often catches employers off guard is Prescription Drug Data Collection (RxDC) reporting. Under the Transparency in Coverage provisions of the Affordable Care Act (ACA) and the Consolidated Appropriations Act (CAA) of 2021, employers offering level-funded health plans must ensure their plans complete this annual reporting.
RxDC reporting requires health plans to submit data on prescription drug spending, medical costs, and rebates, helping regulators analyze trends in drug pricing. The first reports were due in December 2022, covering data from 2020 and 2021, with subsequent filings due each June for the previous calendar year.
Year-End Compliance: Refunds and Plan Assets
One major advantage of opting for a level-funded health plan is the possible refund if the healthcare claims are lower than expected. Level-funded insurance allows businesses to reclaim excess funds, offering cost savings and financial flexibility. However, there are important considerations on how these refunds can be used.
Employers who receive a year-end refund can reinvest these funds in several ways, including:
- Lowering future health plan costs by applying the refund to offset next year’s premiums.
- Enhancing employee benefits, such as improving plan coverage or adding wellness programs.
- Retaining the refund as business savings, which can help offset future unexpected claim costs.
While the refund is a major advantage, the bigger savings come from the lower premiums. Level-funded plans can save businesses up to 25% compared to fully insured plans, making them a cost-effective option for companies looking to manage healthcare expenses while still offering competitive benefits. This combination of lower premiums, potential refunds, and cost control is why level-funded insurance is becoming an increasingly popular choice for small and mid-sized businesses.
Compliance on Autopilot: Tools and Best Practices
Managing compliance for a level-funded health plan doesn’t have to be overwhelming. With the right tools, best practices, and expert guidance, businesses can keep their plans compliant without constant manual oversight.
To stay compliant with level-funded insurance regulations, employers should regularly review these essential areas:
- ERISA Compliance – Ensure the plan follows federal guidelines and maintains up-to-date plan documents.
- ACA Reporting – File Form 1095-B or Form 1095-C as required based on business size.
- COBRA Compliance – Determine whether federal COBRA or state continuation laws apply.
- PCORI Fees – Confirm whether your level-funded plan vendor handles this or if the company must submit it.
- Nondiscrimination Testing – Ensure the plan does not favor highly compensated employees (HCIs).
- Prescription Drug Data Collection (RxDC) Reporting – Work with your TPA or PBM to meet ACA and CAA transparency requirements.
- Year-End Refunds – Determine the best way to apply excess funds while remaining compliant.
A proactive approach is necessary to stay ahead of compliance. TPAs or insurance brokers handle reporting and administration, ensuring that your business remains compliant with ACA, COBRA, and ERISA regulations.
Using HR and compliance software can also help automate ACA reporting, PCORI fees, and COBRA administration. Many payroll and benefits platforms integrate compliance tracking, reducing the risk of missed deadlines or errors.
The Importance of Proactive Compliance
Compliance may not be the most exciting part of managing a level-funded health plan, but it’s one of the most crucial. In addition to keeping your company legally compliant, staying ahead of rules, reporting requirements, and plan administration also helps you avoid needless fines, guarantees more efficient operations, and enhances the advantages you provide to your staff.
As a trusted partner of businesses opting for level-funded health plans and compliance solutions, IXSolutions ensures you stay compliant while maximizing the financial and operational benefits of level-funded insurance. From handling reporting requirements to guiding you through complex regulations, IXSolutions provides the expertise and support needed to keep your plan running smoothly.
By prioritizing proactive compliance and working with trusted experts, businesses can confidently offer affordable, high-quality benefits while protecting themselves from regulatory risks. Simplify compliance and get the most out of your level-funded health plan!
