Choosing the right health insurance plan can be challenging for small to mid-sized businesses. The costs, coverage, and potential financial risks are all factors to consider. Level-funded insurance plans offer an appealing middle ground between traditional fully insured and self-funded health plans, providing predictable monthly costs while allowing some degree of customization.
But how exactly do these plans work, and are they the right fit for your business?
Level-funded insurance plans combine elements of both fully insured and self-funded plans. Businesses pay a fixed monthly amount to cover the expected health insurance costs for their employees, including a portion set aside in a claims fund to pay for actual claims. If the total claims submitted by employees are less than the anticipated amount, the employer may receive a refund at the end of the year. Stop-loss insurance kicks in if claims exceed the expected levels, protecting the business from high-cost medical expenses.
Key Features of Level Funded Insurance Plans
Level-funded insurance plans come with several unique features that set them apart from other health coverage options. One of the most appealing aspects is the predictable monthly costs, where employers pay a fixed amount regardless of claims activity. This arrangement helps manage budget predictability, especially for small to mid-sized businesses.
Additionally, these plans offer customization and flexibility, allowing employers to tailor coverage options based on the specific needs of their workforce. Moreover, these plans provide detailed claims administration and reporting, giving employers access to data that can help optimize plan costs.
Now, let us discuss the level-funded insurance pros and cons.
Advantages of Level Funded Insurance Plans
Level-funded insurance plans offer a range of benefits that make them an attractive option for small to mid-sized businesses looking for cost-effective and flexible health coverage.
Cost Control and Budget Predictability
One of the main advantages of level-funded plans is cost control. Employers pay a fixed monthly payment, providing budget predictability regardless of how many claims employees submit. This structure helps businesses manage their healthcare expenses more effectively, ensuring that they aren’t surprised by unexpected costs.
Tailored Coverage Options
These plans also allow for tailored coverage options, making it easier for businesses to offer employee health benefits that align with their needs and preferences. While your monthly costs remain predictable, you can accurately estimate the cost of your employees’ medical claims, potentially resulting in a refund at the end of the plan year if claims are lower than expected.
Lower Financial Risk
Level-funded plans generally carry a lower financial risk than fully-insured health plans. If your workforce is primarily young and healthy, your premiums may be lower since fewer claims are likely to be submitted. This risk reduction can be a significant financial benefit for small to mid-sized businesses looking to save money on health insurance costs.
Enhanced Plan Transparency
With a level-funded plan, employers benefit from enhanced transparency. Insurers provide monthly data reports that offer insights into claims activity and other cost drivers, helping businesses make informed decisions on optimizing their health plan costs and implementing wellness programs to reduce future expenses.
Potential Tax Benefits
There are also potential tax benefits associated with level-funded health plans. Because they are considered self-funded policies under federal law, they do not need to comply with all state insurance mandates. This can lead to cost savings for employers who are looking for a way to provide competitive employee benefits without incurring the full range of expenses associated with state insurance mandates.
Disadvantages of Level Funded Insurance Plans
While level-funded insurance plans offer many benefits, they also come with some drawbacks that small to mid-sized businesses should consider before deciding.
Strict Participation Guidelines
Level-funded insurance plans often come with strict participation requirements that can be challenging for smaller businesses. These plans typically require a minimum number of enrolled employees or a certain percentage of employee participation to be viable. If your business doesn’t meet these guidelines, you may not qualify for a level-funded plan, limiting your options for providing employee health benefits.
Not subject to state insurance mandates
Unlike fully insured plans, level-funded insurance plans are not bound by state insurance mandates, which can be a double-edged sword. While this can lead to lower costs, it also means that some state-mandated benefits might not be included in the plan. As a result, employees could miss out on coverage for certain medical services that are required in their state, leading to potential dissatisfaction or increased out-of-pocket costs for specific treatments.
Administrative Complexity
Level-funded insurance plans can introduce several administrative hurdles, particularly for businesses unfamiliar with them. Employers must manage tasks like paying Patient Centered Outcomes Research Institute (PCORI) fees, completing ACA reporting, and ensuring compliance with ERISA. For small businesses with limited staff, these responsibilities can quickly become overwhelming, making it challenging to stay on top of the necessary requirements. The extra effort involved might make this option less appealing for those without the resources to handle these complexities efficiently.
Refunds Are Not Guaranteed
While the possibility of receiving a refund is an attractive feature, it’s essential to recognize that refunds are not guaranteed. You are only likely to receive one if your claims fall below the estimate set at the year’s start. Additionally, some carriers issue refunds only if you agree to renew your plan, while others may require you to split the refund as a fee for their services. This uncertainty can make the promise of potential refunds less appealing.
Who Should Consider Level Funded Insurance Plans?
Level-funded insurance plans can be an excellent option for small to mid-sized employers looking for a balance between cost control and flexibility. These plans are particularly well-suited for businesses with relatively healthy workforces, as they offer the opportunity to save money on premiums while providing comprehensive health benefits. Employers in industries like technology, professional services, and small manufacturing, where the workforce tends to be younger and healthier, can find level-funded plans especially advantageous due to the potential for lower overall costs and possible refunds if claims are low.
However, a level-funded health plan may not be ideal for every business. Companies with older or less healthy employees may face higher premiums or limited cost savings, making other health plan options, such as fully insured plans or HRAs, more practical. Additionally, businesses with limited administrative resources might struggle with the complexities of compliance. In such cases, a traditional fully insured plan might offer a more straightforward and manageable solution.
Comparative Analysis with Other Insurance Options
Deciding on the right health insurance plan for your business involves weighing the benefits and drawbacks of each option. Level-funded plans offer a unique blend of predictability and flexibility, but how do they stack up against other types, like fully insured and self-funded plans?
Level Funded Plans vs. Fully Insured Plans
Level-funded plans offer more control over costs and potential savings compared to fully insured plans. With fully insured plans, employers pay a fixed premium to an insurance company, which assumes all risk. This can lead to overpayment if actual claims are lower than expected since there is no chance of a refund.
On the other hand, level-funded plans provide a fixed monthly cost that includes a claims fund, administrative fees, and stop-loss insurance, with the possibility of a refund if claims are lower than anticipated. However, fully insured plans may be better for businesses that prioritize simplicity and want to avoid the administrative burden of compliance or dealing with potential refunds.
Level Funded Plans vs. Self-Funded Plans
While both level-funded and self-funded plans require the employer to assume some level of financial responsibility, self-funded plans carry a higher risk and reward profile. Self-funded plans allow employers to pay for claims directly, potentially saving on premiums, but they also expose the business to significant financial risk if claims are higher than expected. In contrast, level-funded plans mitigate this risk by providing stop-loss coverage and a predictable monthly payment, making them a more stable choice for businesses that prefer some cost predictability while still maintaining flexibility.
Level-funded plans are ideal for businesses looking for a balance between cost control and flexibility, particularly those with a healthier workforce and stable cash flow. The right choice depends on your organization’s size, financial risk tolerance, and specific health benefit needs.
Implementing Level Funded Insurance Plans
Switching from a fully insured to a level-funded health insurance plan involves several steps. Begin by evaluating your current coverage and claims history to determine if a level-funded plan suits your financial goals and workforce needs. Consult with an insurance broker or advisor to navigate the transition smoothly.
Consider key factors such as your company’s cash flow, as level-funded plans require regular monthly payments that cover administrative fees, stop-loss insurance, and a claims fund. Selecting the right provider, such as an experienced insurance company or third-party administrator, is crucial for effective plan management and regulatory compliance.
Finding the Right Balance with Level Funded Insurance Plans
Level-funded insurance plans offer a compelling mix of cost control, flexibility, and financial protection, making them an attractive option for small to mid-sized businesses. By providing predictable expenses and the potential for savings, these plans can help businesses manage their health insurance costs more effectively.
Carefully weighing the pros and cons, and consulting with experts, can help you determine if level-funded insurance is the right fit for your organization.
