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Employee Benefits Related to Labor & Employment Matters

Supreme Court Says Health Benefits Don’t Vest: Contract Principle Apply

Posted in Court Cases, Plan Administration, Welfare Plans

For some time, there has been a question about whether health benefits “vest” under a collective bargaining agreement.   Since neither ERISA nor the National Labor Relations Act actually requires employers to provide health-care benefits, employees typically bargain for health benefits that are then memorialized in a collective bargaining agreement.  Over the course of time, employers have trouble dealing with this potential obligation to provide retiree medical benefits, and as with most disputes, it ended up in litigation.  Now the Supreme Court has ruled on the issue.

In M&G Polymers USA v. Tackett, the Supreme Court of the United States considered a case that directly questioned the obligation to provide retiree medical benefits established through a collective bargaining agreement.  In sum, the retirees were arguing that the right to receive the medical benefits was “vested” as of the date of their retirement, particularly where the collective bargaining agreement made no mention of the duration of these benefits and provided no provision for their termination.  A unanimous Court (which is rare in and of itself) disagreed with the lower court opinion that silence in a collective bargaining agreement regarding the duration of bargained-for retiree health care benefits should be construed as evidence of the parties’ intention that those benefits vest and continue indefinitely.  Instead, the Court determined that ordinary contract law principles should apply.

The general rule in interpreting contracts is that the court has to look to the intention of the parties to resolve ambiguities.  Instead of applying contract principles, the lower court applied a standard that presumed that unless there was evidence to the contrary, the provisions of a collective bargaining agreement providing for retiree medical intended to grant those benefits for life.  This concept, developed under a case called Yard-Man, had acted as the basis for the proposition that retiree medical benefits vest unless otherwise specified.  The Supreme Court’s primary concern was that this presumption improperly places “a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.”  It presumes intent rather than requiring a determination of the actual intent.

It should be noted that the Supreme Court has a fairly long history of determining that welfare benefits (including retiree medical care benefits) are exempted from ERISA’s vesting requirements.  Correspondingly, this is why many plans include provisions that preserve the right to amend or terminate so that there is no implication that they can never be changed.  So while this case deals primarily with collectively bargained obligations, it should also serve as a reminder to plan sponsors to include those provisions in their plan documents so they have that discretionary authority.  As for this case, it provides a not-so-subtle warning to employers engaged in collective bargaining that while silence does not presume vesting, the intent of the parties in bargaining may ultimately become an issue that has to be proven with actual evidence. 

So the take away from this case may actually be more than just an elimination of the Yard-Man presumption.  It may be that it is a reminder to employers that engage in collective bargaining to not assume silence in an agreement has any particular meaning.  You may ultimately have to prove intent, particularly when it comes to benefit issues.  Intent is easier to prove when it is specifically spelled out in actual contract terms.  Therefore, it could be that the best way to preserve the right to change or eliminate benefits (or terminate retiree medical) is to specifically include that right in the agreement.  Sure, it might cause an issue at bargaining, but it may end up avoiding future problems where “proving intent” becomes an issue. 

HIPAA Medical Privacy Matters: Court Permits ADA Claim to Proceed

Posted in Court Cases, Plan Administration, Welfare Plans

Normally I do not like to comment on cases that are not final or court opinions that do not have a definitive outcome on a case.  But this is an exception because of the topic, which is HIPAA and privacy, which can get overlooked too frequently.  Also, because the facts are such that it could happen to other employers,  it bears consideration. 

The case is Myers v. Hog Slat, Inc., which is pending in the Northern District of Iowa.  Myers was employed by Hog Slat and happens to have a daughter who is very ill.  So ill, in fact, that she incurred medical expenses of around $1,000,000.  The employer’s plan is a self-insured health plan, which paid the expenses.  They then terminated Myers, which they claimed was for cause.  Myers sued, making claims under the Americans with Disabilities Act (ADA) and interference with benefits in violation of ERISA (a Section 510 claim).

After the close of discovery, the employer moved for summary judgment.  The Court denied the motion, which means the case can proceed to trial.  The Court determined that the ADA prohibits discrimination against an employee due to expenses arising from a family member’s disability.  But more importantly (from my point of view) was the fact that the Court cited numerous pieces of evidence that not only did the company executives know that Myers’ child was extremely ill, but they actively engaged in discussions about how they could limit the plan’s exposure to those claims.  One key piece of evidence was an e-mail from Myers to the CFO updating him on the condition of Myer’s daughter.  And therein lies the rub.

Arguably, Myers’ e-mail did not implicate HIPAA medical privacy concerns because the individual health information was provided by the father of the child, who was acting on behalf of and for the child.  Information provided voluntarily by the patient himself or herself (or in this case the parent of a minor patient) is not protected health information (PHI) under HIPAA.   Further, because the CFO knew about the sick child, he was able to review the plan expenses and deduce that the higher costs were associated with that particular dependent.  Even that was not in and of itself a violation of HIPAA medical privacy (assuming his role with the plan was part of the plan’s operation).  So there is no indication that there was an improper use of PHI so as to create a privacy violation under HIPAA. 

But just because there is not a violation does not mean the employer can freely act on that information.  Remember that one of the purposes of the HIPAA privacy rules is to make sure  that employees do not suffer adverse employment actions as a result of their employer getting wind of their medical costs paid by the plan.  Here, the employer may not have violated the “privacy rule” but it still used that information to terminate the employee.  So the fact that “medical information” may not be protected does not mean the employee is not still protected from an employer misusing that information.     

Employer Offering Coverage: The Multiemployer Plan Problem

Posted in Plan Administration, Welfare Plans

As we move in to the first phase of ACA compliance, a number of employers have been asking me about unionized employees and how they can know whether the employees are “offered” coverage (as required to avoid penalties) when coverage is provided through a multiemployer plan to which the employer contributes.   The concern is that since the ACA requires an employer to offer coverage, and because the multiemployer plan is not technically their own plan, are they really offering coverage so as to avoid the penalties.

Fortunately, this issue has been addressed in the final regulations implementing the employer play or pay penalty (available at http://www.gpo.gov/fdsys/pkg/FR-2014-02-12/pdf/2014-03082.pdf).  It may have been overlooked, but in the preamble to those regulations, there is interim relief that provides that for employers that are required to make contributions to multiemployer plans under their collective bargaining agreements, if the multiemployer plan offers coverage that is affordable and provides minimum value and is offered to the children of individuals who are otherwise eligible, the employer will not be penalized, regardless of whether the employer’s employee is in fact eligible for the coverage under the multiemployer plan.  More importantly, it also provides that coverage offered by a multiemployer plan to which the employer contributes that is affordable and provides minimum value is considered coverage offered “on behalf of” the employer.  So the obligation to offer coverage is satisfied by virtue of the fact that there is an obligation to contribute to the plan and the plan controls the eligibility.

As an additional protection, the interim guidance now provides that an employer is treated as offering coverage for all employees for whom it is required to contribute to the multiemployer plan, even those full-time employees who never satisfy that plan’s eligibility rules and therefore are never offered coverage.  So employers who are making contributions to the plan (who arguably never have control over the plan’s eligibility rules) are protected as long as they are making contributions.  The fact that the plan may not actually provide coverage does not mean the employer has failed to offer the coverage.

This rule was originally transitional and only applied in 2014, but it has been extended until otherwise modified.  So as long as the employer is obligated by the collective bargaining agree to make contributions to a plan that (1) offers dependent coverage, (2) provides minimum value coverage and (3) is affordable, there would be no penalty.  How does an employer know that a plan does these things?  One thing an employer could do is ask specifically for confirmation from the plan or the union that the plan satisfies these conditions.  Even with the interim guidance, there is still an obligation for the employer to make sure these conditions are met.

So if you are an employer contributing to a multiemployer plan, get confirmation that the plan meets these three conditions.  As long as your collective bargaining agreement requires you to make contributions on behalf of full-time employees, you should be safe because you are “offering coverage.”

Keeping Track of the Numbers: Some of the 2015 “Limits”

Posted in Plan Administration, Retirement Plans, Welfare Plans

At the beginning of each year, there are certain contribution “limits” for retirement plans and welfare plans that I check on just to make sure I am current on my numbers.  While the list is not exhaustive of all relevant numbers, there are some that seem to jump out more often than others and I have compiled a list of the ones that I commonly refer to, and here they are:

  • The annual dollar limit for FSA contributions increases to $2,550
  • But the annual limit for dependent care remains the same, at $5,000.
  • The HSA contribution limit for 2015 is $3,350 for single and $6,650 for family.  The catch-up contribution limit remains unchanged at $1,000.
  • The IRS limit for HDHP maximum out-of-pocket amounts for 2015 are $6,450 for single and $12,900 for family.
  • Something to note: under the ACA, the maximum out of pocket limits for an HDHP are $6,600 for single and $13,200 for family.  Remember, though, that a plan has to comply with the IRS limits even though the ACA may permit them to be higher.
  • Also remember that under the ACA, the deductible, while part of the out-of-pocket expense of the participant as its own limit.  The maximum amount most plans can require participants to pay for deductibles increases to $2,050 for individuals and $4,100 for family. 
  • The ACA Transitional Reinsurance drops to $44 per enrollee, but the PCORI fee increases to $2.08 per covered life.
  • The adoption assistance tax credit rises to $13,400, and the range for phasing out the credit now starts at $201,010.

And lest we forget about retirement plans:

  • The elective deferral limits to most defined contribution retirement plans is increased for $18,000.  The catch-up contribution limit for people over 50 increases to $6,000.  Though not necessarily benefit plan related, the IRA contribution limit remains unchanged at $5,500, with a $1,000 catch up limit.
  • The annual limit for a defined benefit plan remains unchanged at $210,000.
  • The annual limit for defined contribution plans increases slightly to $53,000
  • Finally, the compensation limit used in the definition of “highly compensated employee” increases to $120,000.

If you are a benefit plan administrator or HR professional, chances are you will run across these numbers at some point during 2015, so keep them handy.

In Like a Lion or a Lamb? ACA Compliance Begins

Posted in Plan Administration, Welfare Plans

January 1, 2015 has come and gone.  With respect to employee benefits, it will likely be remembered as the first day of ACA compliance for many employers.  If the past year has been any indication, employers will continue to struggle with the specifics of compliance, but for the time being, the initial considerations are more focused on “where are we now” and how we manage going forward.  So let’s look at some of the keys for where employers should be.

First, assuming that in employer had over 100 FTEs in 2014, and has a calendar year plan, the employer should be offering creditable coverage to full-time employees.  That would be those working 30 or more hours per week over the preceding measurement period that carried through the end of 2014.  Second, this means that employers would be in the first stability period as well, meaning that those employees to whom coverage was offered as a result of satisfying the hourly requirements of the measurement period have that coverage and continue to be eligible for that coverage for a period of at least 6 months and no shorter than the measurement period.  Third, for those employee subject to measurement periods (those variable hour employees), they would now be in their second measurement period to determine whether they will be eligible for coverage for the 2016 plan year.

This overlap of the first stability period and the second measurement period is key because over the next year employers have to remember that both apply.  As we move through 2015, an employee who achieved full-time status during the 2014 measurement period may begin to average fewer than 30 hours per week over the 2015 measurement period.  But that does not mean they lose coverage.  They may lose eligibility for coverage in the 2016 plan year (which is why it is important to track their hours over the 2015 second measurement period), but they maintain that eligibility for the 2015 first stability period because of their status in the 2014 initial measurement period.

As employers make new hires in 2015, the decision then is whether the new hire is a variable hour employee subject to a measurement period (which means eligibility to participate in the health plan would be delayed), or whether the new hire is brought on as a full-time employee.  Remember that new hire who are hired on a full-time basis generally have to be eligible for coverage within 90 days of the date of hire.  So an additional consideration moving forward in 2015 is what status new employees are given as it relates to their eligibility.  Plus we have to keep track of the number of employees we have for each month so that we can ultimate report that at the end of 2015.

The good news is that, at least through the close of 2014, no new regulations or restrictions were passed that significantly alter this basic framework.  Employers should start off 2015 with three basic considerations:

  1. Make sure to offer and maintain coverage to those who are eligible
  2. Make sure to treat new hires correctly
  3. Make sure to count employees in accordance with the instructions for form 1094-C (even though they are still in draft form)

Employers who start 2015 with a focus on these three action items will be better prepared for compliance throughout the year.  And of course, if you have questions about compliance, make sure to ask your attorney at Fox Rothschild for assistance.

Multiemployer Pension Plan Reform: So Now What?

Posted in Plan Administration, Retirement Plans, Withdrawal Liability

When the House passed the most recent budget bill, it included a provision related to multiemployer pension plan reform.  In my last post, I suggested it might be too early to count on anything being final in that bill until it made it into law.  Well, go ahead and start considering it because not only did the Senate pass it, but President Obama signed into law.  And some professionals are touting it as the most comprehensive legislation affecting multiemployer pension plans since the Multiemployer Pension Plan Amendments Act of 1980.

The PBGC has a component called the “multiemployer pension insurance program” which is, according to the PBGC, going to be insolvent in 10 years.  The idea behind the “Multiemployer Pension Reform Act of 2014” is that by making certain changes to multiemployer pension plans, and specifically to underfunded pension plans, PBGC finances will improve.  Of course the first part of this repair is that the annual PBGC insurance premiums for multiemployer plans will double to $26 per participant in 2015, and increase over time.

Along with premium increase come certain specific changes for multiemployer pension plans.  First, some multiemployer funds will be permitted to reduce the pension benefits of plan participants, including benefits for some retirees already receiving benefits.  This is a pretty significant change because it would allow for a cutback of benefits provided certain criteria are met.  It requires a vote of all participants, including actives and retirees, but that vote can be overridden by Treasury if it concludes the pension plan is a “systemically important plan.”  What that means is that it is a plan that the PBGC projects will need more than $1 billion in financial assistance if the reductions are not made.

Second, under the PPA, we created “yellow zone(endangered)” and “red zone(critical)” designations for plans.  Now, plans in these zones will be given additional options in making their annual funding determinations.  This also removes the PPA sunset provision that was expected to expire at the end of this year.  Third, funds must now disregard surcharges that were imposed under the PPA when calculating an employer’s withdrawal liability.   This should cause future withdrawal liability to be reduced, assuming the plan funding status otherwise improves.

Finally, the act gives the PBGC added options when dealing with how it will allocate liabilities resulting from employers who withdrew from a plan and could not pay their withdrawal liability or contributions (say in bankruptcy).  Plus the PBGC will also be able to be more flexible in facilitating merger of plans, particularly if the proposed merger improves the “aggregate funded status” of the merged plan.

So, all things being equal, the Act should have a positive impact on employers who withdraw from multiemployer funds in the future because it is designed to help plans improved their funding status.  However, whether or not funds will take corrective actions, and whether funds will follow these rules remains to be seen.  Going forward, then, employers considering withdrawing from a multiemployer pension fund should make themselves aware of the options available to funds and see if they can determine what steps the fund may be taking under the Act.  And fund trustees should be carefully considering what steps the fund should be taking to respond to the available options.  This is not an elimination of withdrawal liability, but it is the first development in a while that provides some potential relief.

Proposed Multiemployer Pension Reform: Don’t Count Your Chickens Before they Pass

Posted in Plan Administration, Retirement Plans, Withdrawal Liability

Employers participating in multiemployer pension plans are in a constant state of hope that some relief is coming from Congress that will reduce or eliminate unfunded liability and do away with withdrawal liability.  So something like Klein -Miller provision in the budget passed by the House of Representatives last night gets some real attention.  Media outlets are reporting that this is either a massive cutback of retiree benefits, or a complete overhaul of the multiemployer pension system, so you can safely assume it is probably neither.  So before employers start popping the corks about reducing withdrawal liability, let’s look at what is really being proposed.

The PBGC is basically broke, primarily because, at least with respect to that portion that insures multiemployer pension plans, the premiums charged have been ridiculously low.  Since the PBGC insures the plans (subject to various limitations and restrictions), substantially underfunded multiemployer pension plans cause real concern for the agency and Congress over how to pay for the impending doom associated with the possible collapse of these funds.  So they took two big steps.  They raised the PBGC premiums and they made it a little easier for trustees of multiemployer pension plans to act to reduce the underfunded status.  In the process, they cleared up a fight over how to calculate withdrawal liability and passed it over to the Senate.

First, the new rules allow the trustees in “critical and declining” plans to seek approval to “suspend” benefits to no less than 110% of PBGC minimums to the extent needed to avoid insolvency (with various exceptions and limitations).  Plus, trustees are given added protections against claims by retirees for breaches of duty if they decided to make pension cuts.  Second, the new rules significantly revise existing merger and participation rules, which in turn make it easier to have plan mergers.  Plus it allows for the PBGC to provide financial assistance where one of the plans to be merged is in critical and declining status (with various limitations and restrictions).  Third, and most relevant to employers, the new rules clarify that surcharges imposed pursuant to the Pension Protection Act do not count towards calculation of withdrawal liability payments as the “highest contribution rate” against which annual payment limits are calculated.  This has been arbitrated and litigated for some time and it would serve in many instances to reduce withdrawal liability payments.  They also provide that contribution increases mandated by a rehabilitation or funding improvement plan also will be disregarded in certain withdrawal circumstances.  

Note:  Before calling your attorney to discuss how to reduce payments you are making because you have already withdrawn, or to argue about a withdrawal you settled already, remember that the proposed changes would, if passed, only apply to employers who withdraw AFTER the provisions take effect.

So, what’s next?  Well, laws do not become laws simply because the House passed them.  There is has already been heavy anti-reform commentary coming from organized labor and Democrats in the Senate.  Plus, the Senate might have ideas about how to improve things that are different than what the House proposes.  And who knows what the President would do if presented with a final version.  But it is nice to see that there is some discussion about relief, and even better that it actually made it through one side of Congress.  Just don’t start celebrating until the final buzzer.

Investment Policy Statements in Retirement Plans: Are They Plan Documents?

Posted in Court Cases, Plan Administration, Retirement Plans

In prior posts, I have discussed the importance of having up-to-date investment policy statements.  Not only are they a good proof of diligence on the part of fiduciaries (assuming they are followed) but they also serve as a sort of check list to verify that appropriate investment options are being offered.  But are they plan documents and do they actually have to be provided to participants upon request? 

First, let me say that I am a fan of providing participants almost anything they ask for just to support a contention that they have all relevant information.  But on top of that, ERISA requires plan sponsors to provide certain “plan documents” to participants upon request.  Under ERISA, a plan administrator must, upon written request of any participant or beneficiary, furnish various documents, including a copy of the latest updated summary plan description and any “contract, or other instrument under which a plan is established or operated” and it seems logical that the investment policy statement is a document under which a plan is operated.  But there is a mild conflict between the Circuits about whether a request for plan documents includes the obligation to provide a copy of the investment policy statement.

A recent case out of the Fifth Circuit highlights the confusion.  In Murphy v. Verizon Commc’ns, Inc., the Court of Appeals for the Fifth Circuit was asked specifically to consider whether plan investment guidelines must be provided upon request to plan participants and beneficiaries.  The Court looked at the requirements in ERISA and determined that the real question was one as to whether the investment policy statement was actually binding on the operation of the plan.  The Court held that the disclosure requirement of ERISA should be narrowly interpreted, applying only to formal documents governing the plan.   Since the participant did not claim that the guidelines were binding or mandatory in plan operation, they did not have to be disclosed. 

Now under the Sixth Circuit and, to some extent, the Ninth Circuit, the determination would have been less cumbersome because these courts generally favor disclosure of any documents that help participants understand their rights and benefits.  This decision seems closer to the ones in the Second, Fourth, Seventh, and Eight Circuits that generally favor the idea that plan documents related to the operation of the plan are the ones to be disclosed, not every available document.  Either way, there seems to be a clear suggestion that there is a preference to providing a copy of the investment policy statement whenever a participant makes a request for plan documentation. 

So why write about this?  Well, it is a Circuit Court decision that means not only was there a lower court case but there was an appeal.  And all of this over the failure to provide a document.  Plan administrators have a duty to respond to requests for documentation from participants and that includes all documents governing the operation of the plan.  This would seem to include investment policy statements, which further confirms that plans should have one in writing to provide.  To avoid litigation like this, sponsors and administrators should make sure they have current statements, and make sure that they provide them to participants if they are requested.  Otherwise, you might end up being the subject of an article like this in the future.

Down to the Wire: Some Thoughts on ACA Compliance as We Approach 1/1/15

Posted in Plan Administration, Welfare Plans

As we get closer to the January 1, 2015 compliance deadline for large employers under the ACA, I have been inundated with several “last-minute” compliance items that continue to puzzle employers and professionals alike. Here are a few of the most common:

If you are between 50 and 99 FTEs, you might be eligible for transition relief, but it is not automatic. An employer with fewer than 100 FTEs may be exempt from penalties if three conditions are met:

  1. That during 2014, the employer can show that for any consecutive six-month period, it had fewer than 100 FTEs.
  2. That between 2/9/14 and 12/31/14, the employer can show that any reduction in hours or reduction in workforce was based on a legitimate business reason and not simply to avoid the compliance mandate.
  3. That from 2/9/14 through the last day of the plan year that begins in 2015, the employer must keep the same coverage and employer contribution toward the cost of self-only coverage that was in place on 2/9/14.

If you are between 50 and 99 FTEs, and meet these conditions, then you would avoid the pay-or-plan penalties.

To determine whether or not you are an applicable large employer, you have to look at the controlled group, not the individual company. §414(c) of the Internal Revenue Code provides the rules for determining when a controlled group exists, but a key consideration is commonality of ownership. Employers with fewer than 100 FTEs may still be subject to the “pay or play” penalties if they are part of a controlled group that has more than 100 FTEs (for 2015). ACA looks at the entire controlled group for size so if there is any commonality of ownership between two companies, they should be carefully reviewed to see if there is a controlled group.

Seasonal workers that work 120 days or fewer during all of 2014 are not counted for purposes of determining whether the company is a large employer. But if they exceed 120 days in the calendar year, they cannot be ignored for the count and should be added to your FTE calculation.

Employers cannot satisfy the obligation to offer coverage to employee by reimbursing them for premiums paid through the exchange. This applies whether the reimbursement if pre-tax, post-tax or through a Section 105 plan. While an employer can still offer cash in lieu of participation under Section 125, the offer cannot be made exclusively to high risk individuals. It has to be made available to all employees to avoid discrimination concerns.

The measurement of affordability for coverage is based on the employee-only coverage of the lowest compliant plan. It is not based on family coverage, although coverage must be made available to dependents (excluding spouse). It is not a requirement that every option offered under the plan is affordable, but rather that all full time employees are eligible for at least one affordable plan offering that provides compliant coverage.

To avoid a payment for failing to offer health coverage, large employers (that’s more than 100 in 2015) need to offer coverage to 70 percent of their full-time employees in 2015. The 95% rule goes into effect in 2016. But satisfying the 70% rules only goes to the $2,000 per employee penalty, not the $3,000 penalty. This means that an employer with 100 or more full-time employees that offers coverage to at least 70% of its full-time employees in 2015 can still face a penalty if it has one or more full-time employee who goes to the exchange and receives a premium tax credit for participation in the exchange.

I am sure there will be more as we get ever closer to the first day of the 2015 calendar year. However, consider the following: if the objective of the ACA is to make sure that employers provide affordable coverage to full-time employees, any steps an employer takes to avoid that offer of coverage probably has something fishy about it. Not to say it can’t be done, but when in doubt, the safest way to avoid penalties is to offer compliant coverage. If you are thinking of ways to avoid making an offer of coverage, chances are that there is something you are missing. Err on the side of making coverage available and reduce your risk of penalties. I have said numerous times that good plan sponsors want to avoid being the test case when it comes to compliance. Don’t be the first “bad example” for ACA compliance.

Is Self-Insuring the Answer? It Depends on the Question

Posted in Plan Administration, Welfare Plans

As we bear down on the first date of compliance with the ACA, much has been written about the benefit of shifting coverage to a self-funded plan because self-funded plans are not subject to many of the requirements of the ACA.  The suggestion is that self-funding might actually be more affordable that simply purchasing insured coverage.  But cost cannot be the only consideration.  So how does one decide to self-insure a health plan or go the fully-insured route?  Insurance premiums continue to go up, but on the other hand, self-insuring a plan has its own set of risks and burdens to consider.  So what are some of the things to think about when considering either option?  Here are some issues that I commonly see related to that decision.

Remember that when a plan is self-insured, it means the employer is paying all of the health care costs plus administration costs—not “just” premiums.  So the employer bears the risks and is ultimately on the hook for the costs of coverage and the employer, as plan sponsor, has the responsibility for ensuring proper administration and compliance.  Plan sponsors of self-insured plans are faced with real dollar-value problems related to high claims levels, maintaining adequate stop loss coverage (and premiums for that coverage) and fluctuating costs of new treatments and medications.  On the other hand, they are not paying for risk of other employers and their exposure is limited, to some extent, to actual claims.  So the actual dollars spent on claims in a given year can be significantly lower than one would pay for comparable insurance coverage.

Insured plans work so that the insurance company is ultimately responsible for the health care costs and the employer pays premiums.  The only costs concern is the premium dollars.  The insurance company bears the risk (which is built into the premium) so fluctuating costs and unexpected high dollar claims are simply absorbed by the carrier.  Sure, they might increase your premiums next year, but a catastrophic high dollar claim won’t immediately impact the company bottom line.  Plus, most costs of administration are borne by the insurance carrier, not the employer.

Most companies that move to self-insured plans do so because of the size of their population because it becomes less expensive for them to pay for all of the medical expenses than to pay the premiums required by the insurance company to take on the risk.  Smaller companies can consider self-insuring as an option, but they have to be wary of the possibility that significant claims costs can adversely impact revenue streams.  Companies with stable populations or populations with younger, single employees seem to statistically have lower claims experience and might be better candidates for self-insuring.  However, population stability can be tricky to maintain and companies should be keenly aware of anti-discrimination laws protecting employees based on age and marital status (in other words, don’t create a policy of only hiring 25 year old single men to keep health costs low).

Of course any discussion of plan funding should start with an understanding of your annual claims experience, preferably measured over a period of time.  If you are thinking of going to a self-insured plan, or going from self-insured to fully insured, it is best to know what your claims history actually looks like.  It may be that simple plan design changes can be made that make your current funding status more affordable.  And don’t forget the obligations related to being a plan sponsor and the notice and documentation requirements.  Even if the employer contracts out for administration services, the obligations of compliance still fall to the employer.  And don’t forget about discrimination testing.  Self-funded plans are subject to testing requirements that are not in place for insured plans.  Plus there are the added reporting requirements of being self-funded.  The annual cost of these types of administrative issues has to be taken into account before making a final determination.  And there is the need for more professionals, like lawyers, administrators and consultants.

In the end, no one can say automatically which option is best for your plan.  It is a conversation that you might want to have with your broker, benefits adviser or legal counsel.  It should not be just about cost, but also about capacity and capabilities and the administration of a self-funded plan can place a substantial burden on company employees charged with maintaining the plan, particularly if they are not familiar with how benefit plans operate.  So don’t make a decision based on a blog you read on the Internet.  Make it based on the facts specific to your company’s needs and abilities.  In the end, the real question is what works best for your company.