In the constantly changing health insurance landscape, level-funded health plans are steadily gaining ground as a viable middle approach between fully insured health plan and self-funded health plans—arguably offering businesses a more flexible and cost-effective solution when it comes to employee health insurance. According to the Kaiser Family Foundation, the percentage of small employers have level-funded health plans increased from 13% in 2020[1] to ~40% in 2023[2]. Their growing popularity, however, is now catching the attention of both lawmakers and regulators who are concerned about the lack of regulation that exists between fully insured and self-insured plans, particularly regarding the use of stop-loss insurance. In this article, we briefly explain what a level-funded plan is and highlight recent regulatory developments around these popular healthcare solutions.
What is a Level-Funded Plan?
A level-funded plan is a hybrid between a fully insured health plan and fully self-funded health plan. Simply described, on one side of the scale, in a fully insured health plan, the employers pay premiums to an insurance company and the insurance company takes on the responsibility and risk regarding employees’ medical related claims and payments. On the other side, in a fully funded health plan, the employers pay out of pocket from its own fund for the employees’ medical bills. The employers can set up a health/benefits plan funded by its own money and the employer, typically through a third party administrator (“TPA”), takes on the responsibility and risk regarding employees’ medical related claims and payments.
A level-funded plan is a combination of both. A level-funded plan is still a self-funded plan, but the employers can choose to purchase a stop-loss insurance policy to transfer part of the excess or catastrophic risk to an insurer. Employers can utilize stop-loss insurance to mitigate risk if a specific employee incurs significant claims, or if the aggregate cost of claims exceeds a specified threshold. A typical stop-loss insurance policy will include a “specific attachment point” and an “aggregate attachment point” identifying when the policy kicks in and pays claims. For example, a stop loss policy with a specific attachment point of $25,000, means the employer will still be responsible for claims below $25,000 and will pay for them with the money set aside in the level-funded plan. However, if the claims for a single covered employee exceeds 25,000, the stop-loss insurer will pay for the rest. The same principle applies to aggregate attachment point. For example, a stop loss policy with 1 million aggregate attachment point means the insurer will pay if all the claims paid by an employer exceeds 1 million. With level funding, employers generally pay a fixed monthly amount equaling their estimated total claims for a year divided by 12, plus TPA service fees and stop-loss insurance premiums—potentially at a lower cost than traditional group health insurance in the market. Stop loss nsurers may also offer refunds or credits at the end of a plan year if an employer’s payments exceed claims paid for this same year. The cost advantage has level-funded plans gaining popularity among small-size employers, especially those with a relatively young and healthy workforce.
Key Players
Employer – Plan Sponsor
The employer is the plan sponsor for the level-funded plan. For compliance purpose, the level-funded plan is considered an Employee Retirement Income Security Act Plan (“ERISA”) under federal law. ERISA preempts state insurance law, therefore, the employer having and administering a level-funded plan as sponsor is not considered as engaging in insurance business and does not subject to the state insurance regulations. However, the level-funded plan (not the stop loss insurance component) is still subject to a number of compliance requirements under ERISA, Health Insurance Portability and Accountability Act (“HIPAA”) and the Affordable Care Act (“ACA”), all of which impose compliance obligations to the sponsor/employer, which it does not normally have with a fully insured plan.
Third-Party Administrators
Usually, small employers lack the personnel and expertise to set up and manage their own plans, so nearly all employers with level-funded plan hire a TPA to manage the level-funded plan. The employers pay a service fee to the TPAs for those management services. A TPA can assist with designing the benefits plan, drafting plan documents, facilitating enrollment, and processing claims. A TPA can also help with applicable compliance requirements, such as certain notices and reporting under ERISA and ACA. The employers can delegate certain compliance obligations to TPAs, but generally the employers are ultimately responsible as the plan sponsors. Under ERISA, The employers have obligations to monitor and supervise the TPA and ensure the plans comply with state and federal laws.
Stop-Loss Insurer, Insured, and Broker/Agent
Like a regular insurance transaction, the stop-loss insurance component includes three parties: the insurer, the insured, and the agent. The employer is the insured. The insurance companies provide the stop-loss coverage as insurer. The employers normally work with insurance brokers/agents to help them find suitable coverage in exchange for a commission. TPAs are commonly separately licensed as insurance producers and can act as the brokers or agents for the employers. Stop-loss insurance is subject to state insurance regulations, and states may require insurers or agents to be licensed in either the health insurance line or liability/casualty line.
Regulatory Framework of a Level-Funded Plan
To recap, a level-funded plan has two components: the benefit plan itself and the stop-loss insurance policy. And while ERISA exempts level-funded plans from most state insurance laws—such as reserve requirements, mandatory benefits, and premium taxes, ERISA does have certain compliance and legal requirements of its own, for example the fiduciary duties of employers towards the plans and plan beneficiaries. Employers may need to file Form 5500 if their plans also include participant contributions. Level-funded plans also enjoy certain flexibilities because they are not subject to ACA mandates on essential benefits. However, employers that choose level-funded plans will have certain reporting obligations under the ACA that they wouldn’t if their plans were fully insured. Employers that are not considered applicable large employers (ALE) under the ACA need to file Form 1094/5-B series to report minimum essential coverage, and ALEs must file 1094/5-C with additional information. The ACA requires level-funded plan sponsors to pay Patient-Centered Outcomes Research Institute fees. Level-funded plans are also subject to Internal Revenue Code Section 105 non-discrimination testing.
Employers with level-funded plans may incur substantial HIPPA compliance obligations because they might access and process employees’ health information more than they would under a fully insured plan. As a result, such employers need to design plans that meet HIPPA requirements, provide HIPPA notices and training to plan participants, and implement privacy and security policies—and this is not an exhaustive list. Again, employers may be able to outsource some of the notice, reporting, and compliance-related work to third-party administrators, but employers are ultimately the responsible parties, so it is important to carefully negotiate and document a TPA’s responsibilities in the service agreement.
Regulatory Framework of Stop-Loss Insurance
Even though states cannot regulate level-fund plans as health insurance, state regulators can influence level-funded plan markets by regulating stop-loss insurance and its availability to employers.
Aside from general licensing and market conduct regulations on stop-loss insurers and agents, to date , there are three general approaches an individual state has taken to regulate stop-losing insurance:
- A State can set minimum attachment points to make sure that employers only use stop-loss policies to cover excess risk, but not as a replacement for group health insurance. The National Association of Insurance Commissioners took this approach in the Stop-loss Model Act.
California takes this approach for companies with fewer than 50 employees by requiring minimum specific attachment points of $40,000 and minimum aggregate attachment points of either $40,000, 120% of the expected claims, or the total number of group members multiplied by $5,000. As a result, small employers in California are less likely to choose the level-funded plan because of the high risk and high cost for stop loss insurance. (Cal. Ins. Code §§ 10752 to 10752.8)
- A State can prohibit insurers from selling stop-loss insurance to small employers who do not have enough employees.
In New York, insurers may not provide stop-loss insurance to employers with 50 or fewer employees, they may only renew policies issued to employers with 51–100 employees that are effective on January 1, 2015, and they may only issue policies to employers who had 51–100 employees in 2016 if the employers also had stop-loss insurance issued and effective on January 1, 2015. (N.Y. Ins. Law §§ 3231 & 4317).
Delaware prohibits selling stop-loss policies to employers with five or fewer employees. (Del. Code Ann. 18 § 7218)
- A state, for example North Carolina, can regulate stop loss insurance like health insurance and require the plans to meet underwriting, rating and certain other standards typical for health insurance.
Regulatory Trends and Developments
In light of the growing popularity of level-funded plans, regulators are starting to take a closer look at the current regulatory framework. Federal lawmakers are considering a bill that would support self-funded plans by preventing regulators from redefining stop-loss insurance as traditional health insurance. On June 21, 2023, the U.S. House of Representative passed a bill containing the Self-Insurance Protection Act, which would amend ERISA, the Public Health Service Act, and the Internal Revenue Code of 1986 to exclude certain medical stop-loss insurance obtained by certain group health plan sponsors from the definition of health insurance coverage. The bill, which the Senate has yet to act on, would also prohibit states from regulating stop-loss insurance if doing so would make stop-loss insurance inaccessible to employers. It remains unclear whether such a law would preempt state laws, such as those in New York and Delaware, and potentially give smaller employers more access to level-funded plans.
In contrast, some federal agencies have expressed interest in further regulating level-funded plans, highlighting concerns about the use of stop-loss coverage. On July 12, 2023, the Departments of Labor, Health and Human Services, and Treasury (collectively, Departments), issued proposed rules on short-term, limited-duration insurance. Their commentary indicated concerns that stop-loss coverage is not required to comply with certain federal consumer protections and requirements applicable to group health plans or health insurance issuers offering group health insurance coverage or meet state requirements that govern health insurance coverage. They’re also worried about small employers using level-funded plans with low attachment points stop-loss coverage, because such an arrangement would provide most benefits through stop-loss coverage, which could potentially deny or limit an individual’s claim in violation of group market federal consumer protections. If the stop-loss insurer defines the scope of coverage more narrowly than otherwise permitted by federal consumer health care protections (for example, by excluding a preexisting condition), then the employer remains liable for paying claims whose costs they may not be prepared to absorb. As a result, the Departments are considering whether to further regulate level-funded plans and limit their availability.
We will keep monitoring the Self-Insurance Protection Act and regulators’ activities in this area. Insurance brokers who sell stop-loss insurance and TPAs who service level-funded plans should be on the lookout for new regulations in this area. Employers should also pay attention to the regulatory movements, especially those who have level-funded plans or are considering such plans, because new regulations may have a significant impact on small businesses when seeking a more affordable healthcare solution.
1- Kaiser Family Foundation. (October 08, 2020). 2020 Employer Health Benefits Survey. https://files.kff.org/attachment/Report-Employer-Health-Benefits-2020-Annual-Survey.pdf. Page 165
2- Kaiser Family Foundation. (October 18, 2023). 2023 Employer Health Benefits Survey. https://files.kff.org/attachment/Employer-Health-Benefits-Survey-2023-Annual-Survey.pdf. Page 172
