Today, the stakes are high when setting up an employee benefit plan for your company. Trying to find common ground on risk adversity, cost certainty, employee security, plan sustainability, and affordability all begin with your plan funding model. Arguably, your plan funding model can represent one of your most important decisions when setting up your plan.
Arbitrarily deciding one or the other without weighing the potential consequences is both reckless and irresponsible of the broker or benefits consultant. This decision not only affects the costs today but also the future costs for an organization. The biggest risk for any company benefit plan is the unpredictability of claims moving forward.
Funding Model Definitions
When you’re looking at your employee benefit plan, it’s important in understanding the funding models available to you. First of all, what is 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 properly discuss 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.
An employee benefit plan funding model is how a plan is underwritten or how benefits are paid for through a company plan.
The most common options are Insured, Administrative Services Only (ASO), Retention Accounting or Refund Accounting and Health Spending Accounts (HSA). These can be used as stand-alone options or in conjunction with one another. The key differences between the funding models are fixed versus variable cost, plan design flexibility, risk, administrative fees and reserves required.
This is 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 throughout a particular benefit year. 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) Model
This is commonly referred to as a pay-as-you-go 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 the 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.
Another option is to use the ASO model for non-catastrophic components of your plan like dental, paramedical and vision care.
Retention Accounting Model
A Retention Accounting or Refund Accounting model is a hybrid between an insured and ASO model. The employer enters into a contract using fixed monthly rates and depending upon the claims during any given year. Any surplus will be returned or credited back to the client. On the flip-side of the equation, any shortfall in premium collected versus claims paid is required to be repaid to the carrier.
Plan design is critical to minimize exposure to a company.
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, cost certainty, plan flexibility or companies that are looking at a first-time plan.
These HSA amounts can be increased or decreased on the anniversary date and/or calendar year. These amounts can also fluctuate in amounts from employee class and/or tenure with an organization.
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. Often I 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 design is set up and the carrier you use. Unfortunately, the motivator behind which option is presented to clients is often driven by the brokers’ commission.
The various options available are subject to the clients’ appetite for risk,
Get your benefits provider to discuss the options available to you and your company. This decision should not be taken lightly, and full understanding of the pros and cons are paramount to moving in a certain direction.
The correct funding model decision is one of the most important decisions when going about setting up your first benefit plan.