The Employee Benefits Funding Options You Probably Didn’t Know You Had
By: Benefits by Design | Tuesday September 8, 2020Updated : Friday December 11, 2020
One thing that is often overlooked when designing an employee benefits plan is the various options to fund your employees’ health and dental benefits. Before implementing any benefits plan, employers should work closely with their group insurance Advisor to determine which funding option is best for them.
What Do You Mean by “Employee Benefits Funding”?
Employee benefits funding is how eligible Extended Health Care (EHC) and Dental Insurance claims are paid and who pays them. Depending on the option you select, the responsibility for paying claims can go to the insurer, the employer, or both. There are advantages and disadvantages to each of the funding models. The best option for each employer will depend on a variety of factors.
There are three ways to fund your health and dental benefits:
#1. Fully-Insured or Traditional Insurance
The fully-insured funding option, often referred to as “traditional” insurance, is likely the most familiar funding model. Insurers calculate your monthly premiums to cover the expected cost of health and dental claims. They will also account for other factors such as administration fees, taxes, trend and inflation, and more.
You pay the same monthly premiums during the rate guarantee period. Near the end of that period, your plan comes up for renewal. A new set of rates are calculated based on factors such as claims experience, demographic changes, and more. As a general rule, approximately 70 – 85% of the total premium collected are for claims costs. The remainder will cover the insurer’s administration fees and other expenses.
A fully-insured funding model’s main advantage is the consistent costs that allow for easy month-to-month budgeting during the rate guarantee period. Even in the case where more claims are submitted and paid out by the insurer than expected, you will only have to pay what was set as the premium owed. Only future rates are impacted for the loss to the insurer. Keep in mind that with fully-insured funding, if your claims are lower than what was projected, you will not be able to recoup any extra funds paid to the insurer.
A self-insured funding model allows you to pay directly for employees’ health and dental expenses. Insurers will support employers in handling the claims, but the funds themselves come from the employer. This arrangement has the potential to reduce the cost of benefits, as you will not be paying for some risk costs of providing insurance that you would under other funding arrangements.
Examples of Self-Insured Funding
There are many different solutions for providing a self-funded solution to your employees.
Health Care Spending Account (HCSA)
With a Health Care Spending Account (HCSA), employers select an amount of money to provide employees for eligible health and dental expenses. Employees have flexibility and choice in how they spend their dollars and on what. The Canada Revenue Agency (CRA) regulates the eligible expenses under an HCSA.
Employers pay for incurred claims. Unused funds are retained directly by the employer.
Administrative Services Only (ASO)
Under an Administrative Services Only (ASO) funding arrangement, employers only pay for employees’ incurred claims, plus the administration fees and taxes. The insurer will reduce certain charges for risk, so the overall cost is less than a fully-insured plan for certain claims.
There are two types of ASO solutions, Budgeted or Non-Budgeted:
Option #1: Budgeted ASO. A budgeted ASO estimates total costs for the year and determines a monthly premium payment to cover claims and expenses. Any excess premium paid is returned to the employer. If claims are more than what has been budgeted for, employers will need to pay the additional amount owing.
Option #2: Non-Budgeted ASO. A non-budgeted ASO is a “pay-as-you-go” option for claims. There is generally no set maximum per employee, allowing greater fluctuations in costs from month-to-month. Non-Budgeted ASOs can be a viable option for employers with stable claims history and who can account for fluctuations in monthly claims.
#3. Hybrid Benefits Funding
As you may have already guessed, hybrid benefits funding combines aspects of both fully-insured and self-insured funding solutions.
For example, you could choose to offer essential health coverage, such as prescription drugs or medical supplies and equipment, on a fully-insured basis. This allows you to “remove” certain frequently claimed health items (and therefore costly), such as paramedicals like massage, to an HCSA with an overall maximum. This combination allows you to offer the same coverage to employees with greater cost-containment for you. Win-win!
Alternatively, you could consider a split-funding hybrid solution. This option allows you to offer your Extended Health Care (EHC) benefit on a fully-insured basis while “removing” Dental Insurance and placing that coverage under an ASO or HCSA arrangement. Dental Insurance claims are generally more predictable (most employees go for their standard check-ups and not much else), so a self-insured funding model can be very viable. This combination allows you to eliminate additional costs from the plan while ensuring that you do not have to pay for an expensive, unexpected dental claim.
Which Benefits Funding Model is Right for You?
The funding model that is right for one employer may not be right for another. Many factors and considerations should be considered when determining a benefits funding model, including comfortability with risk, claims experience and stability, financial standing and capital, and more.
Speak with your group insurance Advisor about the various funding models before committing to a decision. They will be able to help you determine which is the best fit for you.
Why You Should Use a Group Insurance Advisor