New Tax Advantages of Self-Funded Medical Plans
Employers experience some advantages when electing to self-fund their medical plan, but self-funding does not guarantee a significant reduction of costs. In theory, a self-funded plan is more cost-effective than a fully-insured plan due to the elimination of many expenses associated with a fully-insured plan and the potential of direct savings to the employer from better than expected claims experience. In practice, the actual savings every year will vary based on the claims experience. Over time, almost every employer saves money when they are self-funded; but they do not necessarily save money every year and they do not necessarily save enough to make it worthwhile. An increase in the cost of fully-insured plans would make self-funding more attractive to employers.
As it turns out, the cost of fully-insured plans is going to increase due to Health Care Reform. The Affordable Care Act will increase the taxes and fees on fully-insured plans; the estimated amount is illustrated in the table below. Since these taxes and fees do not apply to a self-funded employer’s claim fund, a self-funded medical plan could be as much as 11.8% less expensive than a comparable fully-insured plan starting in 2016. The additional costs included in fully-insured medical premiums will make self-funding more attractive and advantageous to employers.
This page was last modified on June 28, 2011
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