CONSTRUCTION Accounting ARTICLE -
Self-Funded Health Insurance May Be A Healthy Option
Target Audience: Construction Industry Professionals, Human Resources Department Employees, Business Owners, Project Managers, Contractors, Construction Accountants
The poet Virgil wrote, “The greatest wealth is health.” This may be true but, on the flip side, one of the greatest drains on wealth is health care — especially in the construction industry, where the low number of true full-time employees can drive up coverage costs. In fact, because of rapidly rising health insurance premiums and shrinking budgets, some contractors are choosing to forgo offering health care benefits to their employees as a way to save money in a down economy.
Avoiding high-priced plans, however, doesn’t mean you have to drop this important benefit altogether. A number of alternatives can reduce your financial burden while still giving your employees access to the health care services they need. One such route is the self-funded health insurance plan.
Fewer Fees, More Control of Your Health Insurance Plan
Self-funded plans differ from commercial insurance in that you don’t pay monthly premiums for care employees might or might not receive; you pay only employees’ actual claims — from a fund that you establish expressly for that purpose.
Thus, you save on the costs commonly associated with insurance premiums, including overhead, taxes and commissions. While large insurers and HMOs attach high administrative costs to their plans, self-funded plans typically use a more affordable third-party administrator (TPA) such as an insurance or payroll company to review, process and pay claims from the fund. (For more on TPAs, see “Some FYIs on TPAs” below.)
You’ll also have more flexibility and control over the benefits you cover for your employees, allowing you to base your plan on your budget and the needs of your staff. Self-funded plans don’t have to comply with state mandates that require minimum coverage for things like chiropractic and mental health care. In addition, you can decide whether you want to pay for mammograms, bariatric surgery, substance abuse and other treatments that might not be covered under a traditional health insurance plan.
As for tax savings, you have Congress to thank for this added benefit: The Employee Retirement Income Security Act of 1974 (ERISA) exempts self-funded plans from state jurisdiction. As a result, you aren’t subject to the state premium tax — generally 2% to 3% — levied on conventional insurance plans.
With Reward Comes Risk
The most evident disadvantage of adopting a self-funded plan is the level of risk involved. A series of large claims can leave you hurting — especially in a year during which cash flow might already be weak.
Plus, unlike traditional plans with set fees, self-funded plans require budgeting for unpredictable expenses, which can prove difficult. This need for careful planning and foresight can put added administrative pressure on your management team, because clear communication with your TPA is vital to making sure claims are paid properly and promptly.
You can mitigate the risk of being faced with astronomical bills by adding stop-loss insurance on top of your self-funded plan. A stop-loss insurer will reimburse you for claims costs that reach a predetermined threshold (typically anywhere from $25,000 on up). And the premium you’ll pay on your stop-loss insurance, which varies depending on the threshold you set, will generally be lower than that of a traditional health insurance plan. It’s important to note that stop-loss insurance plans are subject to your state’s premium tax.
Also note that you can further mitigate the risks of high health care costs through wellness programs and employee education.
Factors and Obligations
When debating the merits of a self-funded plan, consider the size and employee demographics of your construction company. While companies with more than 200 employees are the most common users of these plans, smaller contractors can make them work with proper budgeting.
Just keep in mind that a smaller staff means a higher cost per employee. In analyzing your company’s demographics, evaluate factors such as age and history of illness that could foreshadow the nature of future claims.
It’s also critical for a contractor to have a firm grasp on the tax and accounting issues associated with self-funded plans before moving forward. Once you start a self-funded plan, you’ll need to keep a record of health care costs from month to month and total those costs at year end.
Your total costs for each period should include reported claims that your TPA is already processing, as well as claims incurred but not reported and projections of claims that may be incurred. Make sure to have your CPA review the tax deductibility of any claims accrued at year end but not paid until the following year.
Help From the Experts
Before deciding to switch to a self-funded plan, discuss all the positives and negatives with your CPA, attorney and insurance advisor. Collectively, these experts can assist you in assessing your potential savings, weighing your risks and, if a plan is feasible, implementing one that fits your construction company’s budget, size and needs.
Some FYIs on TPAs
The third-party administrator (TPA) you choose for your self-funded health insurance plan (see main article) will be there with you through the process of adopting and implementing the whole of the arrangement — from analyzing cash flow and assessing risk to making sure your claims are paid in compliance with federal law. With this level of financial responsibility, it’s important that you be able to trust your TPA and rely on its expertise.
Make sure you have a solid sense of the organization’s reputation, which you can gather by asking for references and contacting these past or current clients directly. You’ll also want to find out whether a TPA processes COBRA and Health Insurance Portability and Accountability Act (HIPAA) documentation. These federal laws have certain compliance aspects that most TPAs will take care of. It’s also important to ensure your contract states that the TPA will be liable for any errors in processing this or any other documentation.
In addition to having notable experience, a TPA should have its procedures and internal processes audited annually by an outside entity. The results will provide you added confidence that your claims are being assessed correctly and paid promptly.
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