Any differences between FSA and self-insured medical reimbursement pla

[Guest kredlin]

What is the difference between an FSA and a self-insured medical reimbursement plan? They appear to have the same purpose and I am wondering if there are different circumstances when one should be used rather than the other.

[KIP KRAUS]

kredlin:

The major differences I see are self-insured medical plans are more formally designed plans that specify what medical procedures are covered, what dollar limits there are for covered items, what items are not covered, and various other restrictions and limitations that are not typically in a Section 125. Get hold of a fully insured group insurance contract and read it. Then compare it to the Section 125 regulations and you’ll get a good idea of the differences.

I may be wrong, but another thing different is that I believe Section 125 plans are not ERISA plans, self-insured medical plans are.

[Greg Judd]

Originally posted by kredlin

....I may be wrong, but another thing different is that I believe Section 125 plans are not ERISA plans, self-insured medical plans are.  

I had the same thought, but the matter roused my curiosity. Here's what I found in the handy-dandy Section 125 Q&A here at benefitslink:

...while a POP is not a separate ERISA plan, it is ERISA covered because of the type of benefits offered to employees on a pre-tax basis (see ERISA Opinion Letter No. 96-12A).

Click here to go to that QA - #60.

[SLuskin]

The employee doesn't have the "use it or lose it" with the self-funded medical plan. Actually the self-funded plan pays the expenses for the employee, just like the fully insured health plan, and the FSA lets the employee pay his/her own expenses with pretax dollars.

[Bob R]

Actually, they are same. A health FSA is a permissible benefit that can be offered through a cafeteria plan only because it is subject to Code Section 105(h). If it wasn't a plan covered by 105(h), then there would be no provision in the code that would permit an employee to be reimbursed tax free.

The confusion is really a matter of semantics and it just has to do with the design of the plan. Specifically, the benefits being provided.

Most people refer to a 105(h) plan as a plan that resembles an indemnity plan (there is a deductible, co-pays, etc.). And, most people refer to a health FSA as one where benefits are based on an employees election w/out any co-pay, deductible, etc. Both plans are uninsured employer funded plans designed to reimburse employees for medical expenses. (For a health FSA offered through a cafeteria plan, the pre-tax employee contributions are considered to be employer contributions for purposes of the Code).

Also, the use-it-or-loose-it rule applies to both health FSA's and the full self-funded health plan. Many self-funded health plans require an employee to pay a portion of the so-called "premium" just as with a regular indemnity policy. That employee paid portion can be paid pre-tax through a cafeteria plan -- it's generally structured through the premium payment portion of the plan. But, if the employee incurs no medical expenses, the self-funded health doesn't reimburse the employee just like an insurance company wouldn't reimburse a premium if someone didn't submit any reimburseable medical expenses. Likewise, the self funded health plan must pay up to the policy maximum (just like a regular insurance policy) if the "premium" is current. It doesn't matter that the individual only had the coverage for a short period of time.

[KIP KRAUS]

Bob,

You have a very interesting interpretation of the difference between an FSA and a self-insured medical plan. I can’t say that most people would agree with it, but it’s interesting. I don’t know of anybody who would refer to a Section 105 plan as an indemnity plan. Doesn’t a PPO or HMO come under the purview of Section 105? A self-insured medical plan can be designed to resemble an HMO or a PPO, a FSA wouldn’t be. I think Section 105(h) applies to amounts of benefits paid to HCEs, but I could be wrong

A self-insured medical plan can refuse to pay for certain medical procedures where as an FSA will follow the reimbursable items under Section 125 and other regulations promulgated thereunder. It will also often times limit certain benefits to a maximum dollar payment, which will have nothing to do with how much an employee contributes to the plan. FSA payments are typically limited only to the amount of an employee’s contributions unless the employer is also contributing monies to his account.

A self-insured plan will use underwriting procedures to determine the employer’s expected liabilities and determine employee contributions, and COBRA premiums among other things. I’ve never heard of an FSA doing this. By the way, the amount of money an employee contributes to a self-insured medical plan has nothing to do with the concept of the use-it-or-loose-it rules. If that were the case, you could say that paying premiums for any insurance, including auto insurance is a use-it-or-loose-it proposition. This of course would be a matter of semantics.

A self-insured medical plan will often purchase stop-loss insurance. I don’t think an FSA would, but nothing would surprise me these days with what an insurance company would try to sell..

A self-insured plan, if administered by an insurance company may offer a conversion medical policy upon termination of COBRA, but there is no such thing for an FSA.

There are so many other differences between a FSA and a self-insured medical plan that it would take too long to enumerate them on this message board, and without giving everyone a plan design and underwriting lesson I don’t think there is a matter of semantics at all, but a matter of significant differences.

[Bob R]

Kip

What I was attempting to state is that a health FSA and a self-funded health are both vehicles covered by the same Code Section -- 105(h). Thus, in a pure legal context, a health fsa IS a 105(h) plan. As you pointed out, there are numerous differences between what people in the industry, including myself, refer to as 105(h) plans and health FSAs. But, these differences are because of plan design, not because of any statute or regulation. A self-funded health plan has all of the features you mentioned because that's what the employer wants -- it wants coverage similar to an indemnity plan, HMO, PPO, etc. And that's when you need to apply underwriting rules and other factors (which would be required under 419 and 419A if the plan is funded).

But, a health FSA is also a self-funded plan. We typically use the term health FSA when it's funded by employee pre-tax contributions and the maximum benefit is based on those contributions. For purposes of the Code, the employee pre-tax contributions are converted to employer contributions. That makes a plan funded by employer contributions, i.e. - a self-funded health plan. There is a risk of loss and as you pointed out, someone might even try to sell an employer stop loss coverage.

See if the following example makes sense:

Let's start a typical health FSA offered through a cafeteria plan that reimburses participants for all medical expenses. Could I amend that health FSA to require that there be a deductible? I think you could. (Of course participants will take that into account in determining the amount they want to contribute to the plan.) Next, could I amend the plan to require a 20% co-pay? Again, sure. Then, could I amend it to exclude coverage for eye-glasses and experimental procedures? Again, sure.

The result is I've taken a classic health FSA and by merely changing the benefits offered, created a self-funded health plan. The point of my original message is that the health FSA was a plan subject to 105(h) from the very beginning.

As far as use-it-or-loose it, I really don't see much of a difference between what employees contribute to a health FSA and an insurance premium. Think about this description of a health FSA when describing the use-it-or-loose rule to an employer:

A health FSA is like an insurance policy except the participant determines the maximum benefit and the employer is in the shoes of the insurance company. If an employee has paid the "premium" for the month, then the employee can rack up expenses to the policy maximum. If the employee pays premiums for the year and incurs no expenses, the insurance company (i.e., employer) has a profit.