When you’re looking at your employee benefit plan, it’s important in understanding the benefit funding model available to you. First of all, you need to understand what a funding model is as it relates to your employee benefit plan. For our purposes, we will focus on the options most readily available. Many benefits brokers don’t offer options on funding models. Sometimes this is driven by basic assumptions, size of the company, lack of knowledge, limited carrier options and/or commission pay-outs.
For our purposes, we are only going to talk about the Health and Dental portion of a benefit plan because it represents the highest cost (usually 60-80% of the total cost) and represents the largest variable in your year-over-year costs. We will discuss pooled insurance options in a later post.
|Funding Model||Fixed vs Variable Cost||Admin Fees *||Plan Flexibility||IBNR Reserve|
Insured Funding Model
A common model offered by many brokers. It’s prevalent for small and medium-sized companies. It is usually promoted because of its fixed premium cost during the term of the policy. There is a fixed cost rate per participating employee for single, couple or family coverage. The monthly premium will only fluctuate if employees are added or deleted from the company plan, but the rate per employee will stay the same. Employee rates are guaranteed for the period of the policy. Rates are usually renewed after 12-15 months and are determined by previous year’s claims relative to Target Loss Ratio, Trend Factor and any changes to the previous year’s plan. An Incurred But Not Reported Reserve (IBNR Reserve) is factored into your renewal costs as well. Depending upon the carrier, you don’t always have the plan design flexibility that you have in other funding models. You have the option of walking away from an insured policy at any point during the policy year.
Administrative Services Only (ASO) Funding Model:
This is commonly referred to as a pay-what-you-use plan or self-insured. Many are attracted to this option because they can significantly reduce the administrative fees on their plans. By only switching from insured to an ASO funding model without taking heed to plan-design, mitigating against catastrophic illness and employee education could leave your company irresponsibly exposed with costs potentially exceeding that of in an insured plan. An ASO plan that is set up properly can help remove high costs from your benefit plan. Overall claims drive the monthly costs so expect a variable expense from month to month. A company can manage risk from high or catastrophic claims by using Stop Loss Insurance and/or putting caps or limits in place.
Budgeted ASO Model:
A budgeted ASO model is essentially the same as an ASO plan except monthly costs are derived from the previous year’s claims and the estimated claims are evenly paid for throughout the year. The company is responsible for any deficit that may exist at the end of the year but will be refunded any surplus that may exist as well.
Health Spending Account (HSA) Model:
An HSA or HSSA can be used as a stand-alone option or used very effectively in conjunction with one or more of the funding models listed above. It is the most predictable from an employer cost standpoint. An HSA only plan does have a worst-case cost limit as it’s a fixed amount that an employer pays into on behalf of an employee. The employer can choose to have the unused annual amount roll over into the following year or end on a given date. It’s effectively like a bank account that employees draw upon for CRA approved healthcare expenses. This is my recommended option for companies that are looking for a fixed cost, predictable plan cost structure or companies that are looking at a first-time plan.
Benefit Funding Model Options Discussed
Too often, when discussing plan options with prospective clients, the discussion of different funding models brings a look of bewilderment to these clients’ faces. The fact that options other than insured plans exist brings anger and frustration, especially when they have explained the differences in the various models. I often am told when mentioning an ASO plan, for example, that were led to believe that it was far too risky, or they were too small a company to qualify. This can be the case. However, it doesn’t need to be and truly comes down to how the plan is set up and the carrier you use. Unfortunately, the motivator behind which option is presented to clients is driven by the brokers’ commission.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.
Benefit funding model