Self-funded Plan Employee Premium Adjustment

[Guest erinf]

I'll try to be as clear as possible. An employer sponsoring a self-funded health plan wants to basically share the risk of the plan with employees. The plan sets its "premium," based on actuarial evaluation of past claims experience and administrative costs, at the beginning of the year, and requires a 30% employee contribution to it. The employer pays the rest out of its general assets. The owner wants to do the following:

At the end of the year, look at actual claims and expenses for that year, and if the claims/expenses were lower than the expected amount, refund 30% of the excess to employees. If the claims/expenses exceeded the expected amount, charge employees 30% of the difference.

My question is, can he do this legally? My thoughts initially are that if the employees' contributions are run through a Section 125 plan, then any additional contribution/refund would have to be post-tax or it would violate the change of status rules, unless this would qualify for a "change in premium." Would there be a problem with deferred comp if the adjustment was not made until after year-end (in other words, adjustment made in January 2008 for 2007 claims experience)? Would this have to be paid/collected from the employees actually enrolled in the health plan during the year claims were incurred, or employees enrolled as of the date of the adjustment? How would COBRA rates be impacted?

I don't particularly like what this employer has proposed, but I'm not sure that it can't be done. Any input would be appreciated!

[leevena]

I cannot answer all of your questions, but I can address a few.

Yes, the employer could refund, but I would not suggest it. Think of the amount of work that would be needed to identify each employee, how much they contributed, finding ex-participants, and then issuing checks.

Could the employer ask for the extra dollars if the costs exceeded expected, I do not know the legal answer. But from a practical standpoint, it would be very difficult to actually do this. Similar to the refund scenario above, think of the work needed to identify people, communicate, and more importantly collect the money, especially the ex-participants. And, do you really want a situation where employees are now being asked to pay additional dollars, after the fact, for what would be perceived as an employer mistake.

My suggestion would be to change the employee contribution at the new plan year. For example, if the plan costs were low, decrease their contributions. If the costs were higher, increase their contributions. This also has pros and cons, but seems to be better than their plan.

Good luck.

[Don Levit]

erinf:

Could you tell us a bit more about what the employer wishes to accomplish?

I thought Leevena's suggestion was a very good one.

Instead of making refunds or asking for additional contributions, the employer can adjust the benefits once a year.

If the premiums paid were excessive, the benefits can be reduced the following year, or vice versa.

If the empoyer wishes to reward or penalize employees individually based on claims, he can do so through increasing or reducing their individual HRA balances.

Don Levit

[Guest erinf]

To be honest, I'm not exactly sure what the employer wants to accomplish except making sure that he is on target with expected plan performance. Usually when the plans are set up, the employer will get a spreadsheet showing: the anticipated performance, an exceptional performance (e.g. low utilization), and worst-case scenario (all employees max their specific deductible). The premium is usually set based on expected performance. Since the employees always will pay the same amount (for one year) no matter what the actual performance is, I think what he wants to do is protect himself from taking the hit if there is unusually high utilization for the year. I do think this is more of a practical difficulty than anything, but I wonder about the legal implications. I don't think it really has anything to do with incentivizing people for lower utilization, I think he just wants employees to share in the cost of a "bad" plan year.

[leevena]

Your situation is not all that different from other groups that self-fund or partially self-fund. The process of developing a budget can be very difficult, especially for smaller sized groups where credibility is lower.

You last posting stated that the employer is trying to make sure that they do not get caught having to pay more money than expected claims. This is a legitimate concern. Why don't you consider funding at a higher level of claim cost, maybe 90% of the maximum, or worst-case scenario, figure? You have developed a solution to the higher than expected cost and if the claims are lower, any extra funds can be reserved for the following plan year.

A word of caution, and I do not know your situation, but your original posting lead me to believe that you are part of a decision making team at the employer. If this is the case, you should be able to get this type of advice from the person (broker, sales rep., etc) recommending this plan. If your employer is not already getting this type of advice from the sales person, I would be leary of the sales persons ability.

[Don Levit]

erinf:

Why not consider setting up two group plans.

The first would be an employee-pay-all plan, with similar contributions to what they are presently making.

The second group plan wouyld be an employer-pay-all plan.

The first (primary) group plan would be a limited benefits plan, in which participants would have the ability to build benefits each year, if not all the benefits are used.

In this way, employees truly share the risk with the employer, possibly providing the employer with no risk for the vast majority of employees over a few years.

Don Levit