There are typically two approaches to securing health coverage for your staff — group health insurance or self-funding.
Self-funding, however, can be costly and risky and is usually only done by larger organizations with thousands of employees. But there is a hybrid model that can help small and mid-sized employers provide their staff with affordable health coverage: partial self-insuring.
To understand how partial self-insuring works, we should start with the basics of what a self-insured plan is. In a fully self-insured plan, the employer bears the risk of all costs incurred under the plan for claims and administration.
In essence, the employer acts as the insurer and pays claims from a fund that it pays into along with employees, who pay their share of premiums into the fund.
Also, the employer will usually contract with a third party administrator or an insurance company to process claims and provide access to a network of physicians and other health care providers.
How partial self-insuring works
Partially self-insured arrangements provide some of the benefits of being self-funded but without all the risks, while plans will have the same employee benefits as insured plans have. Here’s how they work:
Employers and their employees still pay premiums, a portion of which goes into an account that will be tapped to pay the first portion of claims that are filed. That means that the employer is acting as the insurer for those claims.
The other portion of the premium is paid to an insurance company. This is sometimes known as a stop-loss policy.
Plans have an aggregate deductible for all claims filed by employees, meaning that once that deductible is reached an insurer starts paying the claims instead.
Premiums are calculated to fund the claims to the aggregate deductible amount. In other words, the employer and employees are paying for the worst-cast scenario in each policy year.
The employer can get a refund at the end of the policy year if the total claims come in at a level that is less than expected. The employer can either be reimbursed for this amount or use those funds for the next policy year.
Lower risk than fully self-insured plans
Typically, an employer should have at least 25 workers if it is considering a partial self-funded arrangement, but we’ve seen plans with fewer enrollees.
Many employers will opt for a partially self-insured plan to save money, but these types of plans also allow a business to design a more useful and valuable plan for its workers.
The key to making this work is cost control, without which claims can spiral and drive up premiums at renewal.
Knowing exactly how much to set aside for reserves and how much you should set your employees’ premiums, deductibles and other cost-sharing, can be complicated.
But with the right mixture of benefits, plan design and education, you can control behavior, which drives claims, in order to keep renewal rates from increasing too much each year.
The fine print
That said, there are some reasons partial self-insuring isn’t for all companies:
There is additional responsibility, as the employer basically becomes an insurer of
There is additional paperwork, since the employer also becomes a payer.
There are compliance issues that the employer needs to consider (ERISA and the Affordable Care Act, for example).
There is some additional risk to the business, as it is paying claims.
If you have too many claims, you could face a non-renewal by your stop-loss insurer. If you are cancelled, it may be difficult to seamlessly enter the insured market.
A new wave of class-action lawsuits is targeting group health plan tobacco surcharges, accusing employers of discrimination and violating the Employee Retirement Income Security Act (ERISA), according to two new blogs by prominent law firms.
The lawsuits, according to a blog by Chicago-based Thompson Coburn LLP, assert that the surcharges are violations of fiduciary duty rules under ERISA, as well as discrimination regulations under the Health Insurance Portability and Accountability Act (HIPAA).
The law firm says these cases are being filed across the country on an almost daily basis and to date no courts have ruled to have the cases dismissed.
The fast-developing lawsuit trend is notable, considering that tobacco surcharges are widely used, and if any of the new lawsuits are successful, they could set a precedent that could expose thousands of employers to legal action. Most of the lawsuits are against self-insured plans, but even employers who purchase health insurance and also impose surcharges for tobacco use could be targeted as they are considered “fiduciaries” under ERISA.
The lawsuits hinge, in part, on a HIPAA prohibition on group health plans and wellness plans discriminating on the basis of health status. For example, health plans are barred by the law from charging higher premiums to group health plan participants with pre-existing conditions.
However, HIPAA has one exception to the rule: It allows plans to charge different premiums for employees who enroll in and adhere to “programs of health promotion and disease prevention.”
You can find HIPAA’s non-discrimination rules for wellness plans here.
The lawsuits target a common practice: requiring employees who use tobacco to pay higher health plan premiums than their colleagues who certify that they don’t use tobacco products (cigarettes, e-cigarettes, chewing tobacco and similar products).
Common themes
The lawsuits have two common themes. They allege that the plan:
Did not provide an alternative standard for tobacco users to obtain a discount because the premium reductions for participating in the wellness plans are only available on a prospective basis, in violation of ERISA Section 702, and
Failed to provide information on the existence of such alternatives in “all plan materials.”
The lawsuits typically seek several of the following remedies:
Declaratory and injunctive relief.
An order instructing the employers to reimburse all persons who paid the surcharges, with interest.
Disgorgement of any benefits of profits the businesses received as a result of the surcharges.
Restitution of all surcharge amounts charged.
It should be noted that as of the end of October 2024, no court has ruled on a motion to dismiss a case, according to the blog. At least one case has settled as a class action and the employer and plaintiffs in another class-action case had informed the court that they were working on a settlement agreement and would both ask the court to dismiss the case.
In addition to these private actions, the Department of Labor has sued several employers targeting premium surcharges, including in 2023 when it brought action against a firm whose health plan was charging tobacco users a $20 per month surcharge, according to a blog by Washington, D.C.-based Groom Law Group.
The takeaway
Thompson Coburn said in its blog that these types of cases are snowballing: “Given the number of complaints being filed weekly — at times daily — it is highly possible that any group health plan that applies tobacco surcharges as discussed faces the possibility of a class action lawsuit.”
The law firm recommends that businesses consider reviewing their health plans to ensure that they comply with HIPAA’s non-discrimination rules for wellness plans, which allow tobacco surcharges when applied properly, such as charging different premiums for workers who enroll in and adhere to a program that’s focused on promoting health and preventing disease.
This is a newly evolving threat to employers. We’ll provide future updates after courts rule on the merits of the cases, which will provide more guidance on when tobacco surcharges can be applied.
Employers helping their workers cope with experiencing a disaster will generally find that having an employee assistance program (EAP) in place is invaluable.
Natural disasters, such as hurricanes and earthquakes, cause extensive property damage, physical injuries and loss of life. The distress might not end there, however.
Mental health experts say that many victims of disasters experience post-traumatic stress disorder, depression and anxiety in the months following these events. The loss of loved ones, jobs, material goods and livelihoods are all traumatic experiences for victims, according to one Red Cross official.
An EAP is an intervention program designed to help employees resolve personal problems that might be affecting their work performance. Many employers make EAP services available to employees’ family members, as well.
The problems do not necessarily have to be related to natural disasters – health, marital, financial and parenting issues are also among the problems an EAP can address. However, the program can be especially valuable for an employee who has suffered significant losses in a disaster such as a hurricane, earthquake or wildfire.
After a traumatic event like one of these, an EAP can provide the employee with:
Counseling and other forms of emotional support
Referrals to sources of food, shelter and clothing
Emergency care and boarding for pets
Opportunities for charitable donations
Assistance locating loved ones
Community-based recovery resources
An employee feeling overwhelmed in the aftermath of a disaster can use these services to return a small amount of stability and normalcy to their life. They help take care of short-term concerns, such as finding a place to stay and care for children and pets, allowing the individual to focus on longer-term problems such as repairing or replacing the home and obtaining financial assistance.
These programs have great benefits for employers, as well. Happy and healthy employees are productive employees.
A study by the University of Warwick in the U.K. found that satisfied workers are 12% more productive and provide better customer service than their less happy peers. Employers who implement EAPs experience:
Reduced absenteeism
Fewer workplace accidents
Lower medical and workers’ compensation costs
EAPs also help managers to become more effective. They can help them develop skills in consulting with employees, managing workplace stress, maintaining drug-free workplaces, responding to crises, and helping employees achieve an appropriate work-life balance.
EAP options
Employers have several options for establishing EAPs.
They can run them with their own staff or outsource them to third party providers. Providers can be hired on a fee-for-service basis or for a fixed fee.
They can be arranged by single employers, groups of small employers banding together, or by unions. Some employers or unions even train employees to provide peer counseling to their fellow workers.
EAP providers should meet the standards set by the Employee Assistance Professionals Association. These include standards for program design; management and administration; confidentiality; direct services; drug-free workplace and substance-abuse professional services; partnerships; and evaluation of the program.
The takeaway
Even without catastrophic weather events, employees are subject to the stresses of day-to-day living, and their paths are often bumpy. Family members can develop substance-abuse problems, parents grow old and need care; unexpected financial shocks occur; and marriages often deteriorate.
By implementing an EAP, an employer can help make these problems, and the shock of a natural disaster, a little easier for their employees to manage.
EAPs can help retain good employees, make them more productive, and make their lives a little better. In turn, this can make a business more profitable and a better place to work.
More than half of employees regret the coverage decisions they make during open enrollment, according to a new study.
Part of the problem may be that the average employee spends only 30 to 60 minutes selecting their benefits during open enrollment, which typically lasts about two weeks in most workplaces, according to the study by financial service firm Equitable. For perspective, the average American spends 120 minutes a day on social media.
The findings in the study underscore the importance for continuing education and outreach on their benefits and providing your workers the opportunity to ask questions in a private setting.
The top reasons employees cited for regretting their decisions include:
25% said they failed to adjust their benefits to match their lifestyle changes.
20% forgot to make changes to their benefit selections by the deadline.
19% did not understand the options available or the benefits they selected.
It should be noted too that sometimes the regret comes after the plan year starts and an employee in a high-deductible plan, low- or no-premium plan has a health issue that crops up or an accident, and has to pay thousands out of pocket. At that point they may rue their choice, even though they would have paid more in premiums.
One of the more disturbing findings from the study is that nearly 25% of workers said they go to social media to educate themselves about employee benefits. The numbers were highest among Gen Z workers (43%) and millennials (37%).
On the other side of the spectrum, 67% of baby boomer employees and 60% of Gen X workers were more likely than younger generations to rely on information provided to them by their employer and benefits broker when making health plan and other coverage decisions during open enrollment.
How you can help
Employers can help their employees make smart health plan decisions by:
Not inundating them with lengthy educational materials. Often clear and concise materials are best, especially ones that use bullet points and infographics. Benefits experts recommend providing employees bite-sized information that can help them whittle down their choice.
The materials should give different scenarios for workers to help them decide on a plan, such as:
A 27-year-old single female employee with no health problems, spouse or dependents.
A 46-year-old married father of three young kids.
A 58-year-old divorced woman with high blood pressure and asthma.
Keeping the open enrollment period short. Many brokers will tell you that the longer the open enrollment period, the more likely it is that employees will procrastinate on choosing their plan(s) and rush at the last minute. For best results consider a two-week period, and a run-up that includes education and outreach.
Helping them prioritize the basics. There are a few areas that they should review to make sure they choose wisely.
Some areas they can focus on include:
Retaining their doctor — Even if you are offering the same plan as last year, it’s a good idea to tell your employees to check the plan to see if their physician or their kids’ pediatricians are on the list of providers. Health plans make changes every year, so it’s important to check.
Getting the financial balance right — Many people end up spending more up-front on higher premiums in exchange for lower out-of-pocket maximums and/or deductibles, when they shouldn’t.
A young, healthy person that rarely visits the doctor may be better off with a plan that has lower premiums and a higher deductible, which they will not likely reach.
Worst-case-scenario calculation — Your employees should understand the implications if they suffer a medical crisis. For a full perspective, they can:
Calculate the total premium they will pay for the entire year (their monthly premium contribution x 12), and add
Middle class families — those with incomes of between roughly $50,000 and $100,000 per year — are becoming increasingly reliant on workplace benefits to ensure their financial well-being in case of a disability or critical illness.
Simple health insurance is insufficient to carry the load. The loss of a breadwinner’s or caregiver’s financial contribution through death or disability is often devastating.
A recent survey by benefits provider Guardian indicates that families in this category are struggling when it comes to achieving their financial goals. Of those workers surveyed only half believe they would be able to manage if the household lost an income due to death or illness.
Workplace benefits are critical
According to Guardian’s researchers, the middle-market population is overwhelmingly reliant on the quality and breadth of the benefits they receive at work — over and above cash compensation.
Over 80% of middle-market respondents report that they got their health insurance, disability insurance and retirement plan all through their employer.
Meanwhile, six in 10 have no life insurance in place outside of the workplace. This means that the solid majority of working families are relying entirely on workplace benefits to see them through the death of a family breadwinner.
And in the event of disability ending a breadwinner’s income, the situation is even more dire: Only 7% of the middle market owns any kind of disability insurance protection, outside of what they are able to access via their employer.
Are life insurance benefits adequate?
For young families, the primary role of life insurance is to replace the income of a deceased breadwinner. But many employers cap life insurance benefits at $50,000 — the maximum figure that allows employers to deduct premiums as a workplace benefit under IRC 7702.
The actual need for many of these families is several hundred thousand to a million dollars, and occasionally more. That’s what it takes to replace the income of a worker who earns $50,000 to $100,000 per year until the children are out of college and a surviving spouse is taken care of.
A solution
One solution is to offer voluntary benefits to workers. These include a menu of benefits, such as:
Group life insurance
Group disability insurance
Long-term care insurance
Critical illness coverage
Often many of these benefits can be offered at little or no cost to the employer.
Premium costs are simply deducted from the worker’s wages and forwarded to the insurance company via payroll deduction. In this way, workers can purchase much more coverage and provide protection for their families — and it doesn’t cost the employer a dime.
In some instances, it can even save on payroll taxes. To learn more, call us.
By now you should be prepared and ready to go for your 2025 policy year employee benefits open enrollment. You should have all your plan documents and have prepared or held presentations for your staff to explain the benefits package and any major changes to plans that you offer.
Employees should be familiar with how to use the enrollment portal and who they should talk to if they have questions.
To ensure success, there are a few things you should do to make sure you maximize enrollment, that your employees have the correct materials and that you are in compliance with the law.
Take an active role — Most of the policy selection is done online, but that doesn’t mean you can’t support your employees and let them know you are there in case they have any questions or are confused about any aspect of the benefits package.
You should want all of your employees to choose the package that best fits their individual needs. To ensure they make the best possible choices and have a successful experience, motivate them to take an active role in their education by encouraging questions and showing them where they can find answers in the online enrollment platform.
Last-minute blasts — You’ve probably sent a few e-mail reminders to you staff, but most certainly some of them still missed those communications. Make sure you send a few extra blasts at different times of the week, like Tuesday at 10 a.m. and another on Thursday at 2 p.m.
You should also have all of your employees’ mobile phone numbers, and be sending them reminder text messages is a sure-fire way to get in front of the ones who may not be as diligent about monitoring their e-mail.
Double-check your plan materials — Do a final review of your plan documents for any necessary updates regarding member eligibility, plan benefits, new vendors and name changes to ensure that the current state of your benefits offerings is complete and accurate.
Also, do a final review of your summary of benefits and coverage (SBC) and your summary plan description (SPD) to make sure they reflect any changes from the prior year. This is crucial as both documents are required under the law.
The SPD may include the elements necessary to meet the requirements of the SBC, but it also needs to be a separate document that can be handed out with respect to each coverage option made available to the participants.
To account for the annual open enrollment window, double-check your open enrollment schedule, deadlines, documents and forms, coverage options and changes, phone numbers, and website and mobile information for contacting resources, statement of current coverage, and plan-specific summaries and rates.
Identify staff that didn’t enroll last year — To make sure you maximize participation and that nobody misses out, run a list of all your staff who didn’t sign up for benefits last year so you can approach them individually and convey the importance of securing health coverage.
While you’re at it, make sure that all of your new hires in the past year have also signed up for coverage and that you didn’t miss them when sending out reminders about open enrollment.
Check compliance with ACA — If you are an “applicable large employer” under the Affordable Care Act, meaning that you have more than 50 full-time or full-time equivalent employees, you are obligated under the law to provide health coverage to your staff that is “affordable” and covers 10 essential benefits.
There is a figure for what is considered affordable, which changes every year. For your plan to be considered ACA-compliant in 2025, it must not cost an employee more than 9.02% of their household income.
The takeaway
To ensure maximum enrollment it pays to plan ahead and also focus on educating your staff about the importance of their group health plan and why it’s so important to choose a plan that is right for them and that is within their budget in terms of premium-sharing and out-of-pocket costs.
The key regular communications and having an open-door policy so individual employees can ask questions in private.
