Self-Insured Plans Audit Requirement

[Guest JoeLodge]

I am looking at a single-employer plan that provides health insurance, life insurance, dental, etc. It is self-insured for health and pays in monthly amounts to the plan third-party administrator based on an estimate of total claims for the year. It has about 150 participants. If the employer pays in a set amount of contributions per employee each month for health insurance and employees also make contributions, whatever balance is held by the TPA at year end is plan assets, and schedule H is required, and a plan audit is required, correct? Are there any exceptions I should be aware of?

What if the employee portion is only to cover dependents? Does that change anything?

[Chaz]

The plan administrative scheme should be changed so that all amounts for claims come from the employers's general assets and there are no amounts held by the TPA. In that way, there are no plan assets and the attendant obligations. The best way to do this is to have a bank account in the employer's name (not the plan's) from which the TPA has check-writing authority.

This arrangement may conflict with the TPA's business model and may require discussion during the ASO agreement negotiation but I advise clients to go in another direction if the TPA insists on holding amounts in its own name (e.g., reserve deposit, bank accounts, etc.)

[Guest JoeLodge]

Thanks for the help. So am I correct that as the plan is currently structured, schedule H is required for the Form 5500, and audited financial statements must be attached?

[Flyboyjohn]

I would argue that having some $$ on deposit at the TPA does not create a "funded" plan.

The $$ either still belongs to the employer or belongs to the TPA but doesn't belong to "the plan".

I agree with Chaz that it would be much better to have the claims payment account in the name of the employer and just let the TPA draw against it but I'm not convinced that the current arrangement constitutes a funded plan so I say no H and no audit.

[Guest JoeLodge]

I really hope you are both right, but I don't want to get my hopes up.

My main concern is the part in the Form 5500 instructions that defines an unfunded plan. It says:

An unfunded welfare benefit plan has its benefits paid as needed directly from the general assets of the employer or employee organization that sponsors the plan.

Plans that are NOT unfunded include those plans that received employee (or former employee) contributions during the plan year and/or used a trust or separately maintained fund (including a Code section 501©(9) trust) to hold plan assets or act as a conduit for the transfer of plan assets during the year.

Because employees have payroll withholdings to pay premiums for health insurance, it seems that these withholdings should be considered employee contributions to the plan, which would make this plan funded. Please help me understand if this can still be considered an unfunded plan. I need to be able to justify this to people reviewing my work, the client, and myself.

[Chaz]

I would review the DOL's Technical Release 92-01.

[Flyboyjohn]

And also DOL Technical Release 88-01.

Not the easiest stuff to read but between the 2 they essentially say if you don't have a trust and the employee contributions are pursuant to a 125 cafeteria plan the self-funded plan is considered "unfunded" for 5500 and audit purposes