Pros and Cons of Level Funding Insurance

Employers looking to cut costs are moving away from fully insured plans and moving towards self-funded plans that can offer greater flexibility. With self-funding, the company is responsible for funding claims payments, but the employer experiences fluctuating expenses by paying the claims as they come in. For companies looking to add predictability back into the equation, level funding (a form of self-funding) allows employers to pay a set amount each month.

What are the advantages of level funding?

  • Budget friendly: Self-funded plans leave you vulnerable to large fluctuations in claim payments, but level funding will allow you to better manage your budget and keep your cash flow consistent with monthly payments.
  • Fixed monthly payments: Each month you will pay the same amount, and if you have a surplus at the end of the year, you will receive a refund. Alternatively, if claims are higher than anticipated, employers can protect themselves with stop-loss insurance.
  • Tax advantages: Employers who self-fund are exempt from Employee Retirement Income Security Act (ERISA) rules and are not subject to state health insurance premium taxes, resulting in immediate savings.
  • Full access to claims information: Employers can see how claims dollars are being spent! This is a major benefit to employers because they are able to see who is utilizing the plan and where. This data can help employers plan for the next year as well as educate its employees on how to use each service and when. For example, when to use the urgent care as opposed to emergency room to bring down costs.
  • Plan flexibility: Level funding provides greater plan flexibility and more control to meet the needs and budget of each employer opposed to a one size fits all fully insured option.

What are the disadvantages of level funding?

  • Greater risk: Self-funding and level funding insurance plans place the risk on the employer. In years where employees are healthy and not many claims are placed, employers can see big cost savings, but in a worst-case scenario the risk may be too great for some organizations. Companies can, however, protect themselves with stop-loss insurance.
  • Administrative needs: A portion of your monthly payment will need to go towards covering administrative fees. Even with a third-party administrator (TPA), you will also need someone in-house who understands the plan and can work with the TPA to ensure everything runs smoothly.
  • Contract terms: Some plans may restrict their offerings to companies with a certain number of employees, so it is important to truly understand the contract terms and determine what will be right for your business.

While level-funded plans may raise concerns in certain areas, the potential cost savings, plan flexibility, and budgeting benefits are generally well worth the risk. Larger companies have historically benefited most from self-funded and level-funded plans, but more and more small to mid-sized companies are beginning to see the impact it can have on their organizations. If you’d like to find out if level funding insurance is right for you, Contact Us!

Categories: Employee Benefits

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