This article is for employers who want to understand level-funded health plans.
Healthcare costs rise every year. Many small employers now use level-funded plans rather than fully insured plans. This article covers the differences between these plans and the compliance requirements for level-funded plans.
Not sure if you have level-funded coverage? In Gusto, go to Benefits and check your medical plan name. If it says “level-funded,” this article applies to you. If not, you have a fully insured plan.
Fully insured plans charge every group the same premium. Level-funded plans base your premium on your group’s past healthcare use. This can save you 10-20% compared to fully insured plans.
Level-funded plans have a few more compliance requirements. Review these compliance deadlines to get started.
Note: This does not include all requirements for your company.
We help with many compliance requirements, but we do not support some at this time. For those requirements, we partner with RTO. To learn more about RTO services, email [email protected].
Your carrier may offer more compliance support through a partner. To learn more or opt in, contact the Benefits Care team.
Your plan includes free access to Mineral, which helps with select compliance requirements. To opt in, refer to the Mineral welcome email you received upon coverage approval or visit http://apps.trustmineral.com/. For questions, email [email protected].
Level-funded plans differ from fully insured plans, especially in pricing and renewal rates.
Level-funded plans reward employers who support employee health and well-being. If your team files fewer healthcare claims, you might get a rebate at the end of the year (criteria and eligibility vary by carrier). If claims are higher than expected, your renewal rates could go up. Once your plan year starts, your monthly rates stay the same until renewal, no matter how many claims you have.
Here are some key differences between these two types of group health insurance.
Fully insured
Level-funded
Most common type for small employers
Gaining popularity as healthcare costs rise
Premium rates apply to all groups (community rating).
Premium rates depend on your group’s past healthcare use.
Works for small and large groups
Works for small and large groups
Fewer compliance requirements for employers
More compliance requirements for employers
Stop-loss (or “excess-loss”) insurance covers the gap between total claims costs and the claims pool. It’s a separate policy from your health plan. In a level-funded plan, stop-loss insurance keeps you from paying more than your fixed monthly premium during the plan year, no matter how many healthcare claims your team files.
Carriers typically include stop-loss insurance in their level-funded plans. Your bundled pricing already includes it, so your monthly premiums stay the same all year.
Both federal COBRA and state continuation allow terminated employees to temporarily keep the same plan they had through their employer. Terminated employees pay their entire health premium plus an administrative fee.
Continuation coverage rules for level-funded plans depend on how many full-time employees you have.
Companies with 20 or more full-time employees: Terminated employees are eligible for COBRA if you have 20 or more full-time employees or full-time equivalents (FTEs). To check COBRA eligibility, go to the Check if federal COBRA applies to your company section of the article.
Companies with fewer than 20 full-time employees: State continuation (also known as “mini COBRA”) does not apply to level-funded plans. This means companies with fewer than 20 employees cannot get medical continuation coverage. Level-funded plans are self-insured plans that follow the Employee Retirement Income Security Act (ERISA) and federal laws, not state laws.
We partner with Anuvi to handle federal COBRA continuation enrollment. The employee keeps the same plan, but pays 100% of the premium plus an administrative fee. If they enroll, you and the former employee manage payment outside of Gusto. Insurance carriers charge an administrative fee for COBRA. Employees may find lower-cost plans through their state’s individual market. We recommend Stride to help people shop for coverage in the individual market. They help with enrollment, find subsidies your employees may qualify for, and provide an online portal for managing coverage, payments, and renewals.
Employees can only enroll in coverage types they had when they left (e.g., if they waived dental coverage, they cannot enroll in dental COBRA). If they had more than one coverage type (e.g., medical and dental), they can choose which ones to keep (e.g., keep medical and drop dental).
If Gusto is your insurance broker, we help determine if federal or state continuation applies to you. The number of full-time and full-time equivalent (FTE) employees you have determines if federal COBRA or state continuation applies.
Federal COBRA generally applies to companies with at least 20 full-time employees or FTEs for 50% of their working days in the previous calendar year.
If your company has fewer than 20 full-time employees but part-time employee hours reach a certain threshold, your company may still qualify for federal COBRA.
A part-time employee is counted as a fraction of a full-time employee then added to the FTE total. Calculate your FTE total here.
Note: Level-funded groups cannot get state continuation. If your group also has fewer than 20 employees and does not meet the COBRA eligibility above, your group will not have any continuation coverage.
This section applies if your company is eligible for federal COBRA (20 or more full-time employees).
If we manage your health benefits or you have the broker integration and COBRA add-on, here’s what happens when you dismiss an employee.
Note: Dismissed employees who do not want COBRA can shop for plans on the individual marketplace. If they qualify, they can also enroll as a dependent on a spouse’s or parent’s plan. Losing current coverage is a qualifying life event that allows enrollment outside of open enrollment.
We provide an administrator, Anuvi, for companies subject to COBRA. This makes sure dismissed employees are handled correctly. For companies that offer benefits with Gusto, there’s no extra cost.
If your company chooses not to use Anuvi, you need to find a third-party administrator to handle all aspects of COBRA administration.
What to expect when you dismiss an employee
If your dismissed employee is enrolled in benefits, here’s what to expect:
After the dismissed employee’s last day of work, Anuvi sends a continuation notice to their email and home address. The notice explains their rights and the next steps to continue their current coverage.
The dismissed employee has 60 days from the date they lost coverage or when they received the COBRA election notice (whichever happens last) to enroll. They should follow the instructions in the continuation notice and contact their insurance carrier with questions.
Dismissed employees who opt into Federal COBRA will stay on your company’s carrier invoice. Anuvi collects funds from COBRA participants each month and forwards them to the company (by check or ACH), so your company can pay the total invoice directly to the carrier.
Dismissed employees can enroll only in the coverage types they had when they left (e.g., if they previously waived dental coverage, they cannot enroll in dental COBRA). If they had more than one coverage type (e.g., medical and dental), they can choose which ones to keep (e.g., keep medical and drop dental).
This section applies if your company is on a level-funded plan and does not qualify for federal COBRA and state continuation (fewer than 20 full-time employees).
If your company is ineligible for state continuation or federal COBRA, we recommend your former employees get coverage through our partner, Stride. Stride helps people find coverage in the marketplace, assists with enrollment, and finds subsidies that your employees may qualify for. They also provide an online portal for managing coverage, payments, and renewals.
As the employer, you cannot offer medical continuation coverage if you have a level-funded plan and do not qualify for federal COBRA.
You may have terminated employees on state continuation prior to converting to a level-funded plan. If this is the case, once your level-funded plan becomes active, any employees on state continuation will no longer be eligible to stay on state continuation. These employees are typically sent a termination letter from the carrier that can be used as proof of loss of coverage if they decide to enroll in other coverage (e.g. spouse’s group health plan or through the marketplace).
If your company has 20+ full-time employees and employees have continuation coverage through Federal COBRA, there is no impact when your company converts to a level-funded plan.
The Patient-Centered Outcomes Research Fee (PCORI) is part of the Affordable Care Act (ACA). This filing fee applies to level-funded plans. If you have a level-funded health plan, you’re responsible for calculating the total fee and sending payment to the IRS. You need to pay by July 31 each year for plans that ended in the previous year.
You can also use a third-party administrator, like our partner RTO, to handle these calculations. To learn more about RTO services, email [email protected].
The IRS sets the PCORI fee amount and adjusts it each year. You calculate the total fee by multiplying the annual PCORI fee by the number of covered lives for that plan year. Learn how to calculate the fee.
Check the IRS website for the most current deadline and fee information.
To stay compliant with PCORI requirements, you must:
Calculate the fee.
Fill out IRS Form 720.
Submit Form 720 and PCORI fee payment.
You can use three methods to calculate the average number of eligible employees. When you file Form 720, you report the average number of lives your level-funded health plan covered. This is the average number of eligible employees.
Use one of these methods to calculate total fees for Form 720:
Actual count method: Count the total number of lives covered for each day of the policy year. Divide that total by the number of days in the policy year.
Snapshot method: Count the total lives covered on a date during the first, second, or third month of each quarter (or more dates in each quarter if you use an equal number of dates for each quarter). Divide that total by the number of dates you used.
Form 5500 method: Add the total participants on Form 5500 at the beginning of the year and the total participants on Form 5500 at the end of the year. Divide this sum by 2.
The IRS provides instructions for completing Form 720. You can fill out and send the form in different ways. We recommend that you consult with a tax professional before completing and submitting Form 720.
Complete Form 720 and fill out the PCORI section on the second page under Part II, IRS No. 133. This is where you report the average number of participants (eligible employees) using one of the calculation methods described in the Calculate the PCORI fee section of the article.
To submit the PCORI fee, go to the final page of Form 720, titled the Form 720-V, Payment Voucher. You need your company’s Employer Identification Number (EIN) and the PCORI fee payment amount you calculated in Part II, IRS No. 133.
File Form 720 and send payment electronically or by mail.
You may need to fill out other sections of the form for other business purposes. We recommend that you consult with a tax professional before completing and filing the 2nd quarter Form 720.
Annual non-discrimination testing (NDT) makes sure health plans do not favor highly compensated employees (HCEs). You may complete NDT for cafeteria plans under Internal Revenue Code (IRC) Section 125. When you have a level-funded health plan, you also need to complete NDT under IRC Section 105 (h). Level-funded plans must complete NDT under both Section 125 and Section 105(h).
We partner with RTO for compliance services that we do not support.
When to complete non-discrimination testing
You need to complete NDT before the end of the plan year. We strongly recommend you complete this mid-year in case you need to take any corrective actions.
IRC section 105(h) requires two tests:
Eligibility test: This test makes sure a certain percentage of employees can access benefits. You can satisfy this requirement in three different ways:
Benefits test: This test makes sure highly compensated employees (HCEs) do not receive better benefits than other employees or pay lower premiums for the same benefits.
Highly compensated employees (HCEs):
More than 10% shareholder or owner
Top 25% compensation
One of the five highest-paid officers
Excludable employees:
Part-time or seasonal employees
Part of a collective bargaining unit if health benefits were the subject of good-faith bargaining
Have not completed 3 years of service
Have not reached the age of 25
Nonresident with no US source earned income from the employer
You may qualify for a year-end rebate with a level-funded plan. This depends on how many claims your group files and how much they cost. If your group files fewer claims than expected and meets your carrier’s criteria, you may get a rebate. The rebate comes directly from your carrier, not from Gusto.
How to handle year-end rebates
If you meet all rebate criteria, you need to follow certain provisions when you receive and distribute the rebate. Below are a few considerations. We strongly recommend you speak with your legal counsel or tax advisor.
If employees pay part of the premiums, they qualify for a portion of the rebate. You can distribute the funds in these ways:
Return the rebate to the participant as a cash payment.
Apply the rebate as a reduction of future participant contributions (e.g., a “premium holiday”).
Apply the rebate toward the cost of benefit enhancements.
Getting a rebate may make your plan “funded.” If this happens, your plan may have more compliance requirements.
The Employee Retirement Income Security Act (ERISA) requires level-funded plans to file the Form 5500 series. This filing makes sure you administer and operate your health plan appropriately. Many companies may not need to file. You need to determine if you qualify for an exemption.
To complete the filing or if you’re unsure whether you’re exempt, work with your legal counsel or tax advisor.
If needed, we partner with RTO for additional compliance services, including completing the Form 5500 filing requirement.
Form 5500 filing deadline
You need to file Form 5500 by the last day of the seventh month after your plan year ends. If your plan year follows the calendar year, you need to file by July 31. If you need more time, you can request an extension—but you must file IRS Form 5558 by the same deadline.
Check if you’re exempt from Form 5500 filing
You need to meet several criteria to be exempt from this filing. This includes (but is not limited to) having an IRC Section 125 Cafeteria Plan, sending premium payments to carriers directly and quickly, and having fewer than 100 employees. If you have more than 100 employees, you generally need to complete this filing regardless of whether your plan is level-funded or fully insured.
If you think you may be exempt, contact your legal counsel or tax advisor to confirm. We cannot make this determination on your behalf.
Review our Benefits Compliance Checklist for guidance on existing regulations. This checklist applies to small-group health insurance as well, so some items may not apply to level-funded plans, like state continuation (mini-COBRA).
If you have questions or if we cannot support certain areas, contact your legal counsel or tax advisor. They can best help you with the requirements of level-funded plans.
For employer responsibilities we do not support, we partner with RTO. To learn more about RTO services, email [email protected].
The Affordable Care Act (ACA) includes requirements for employers about health care coverage. Your company’s size and structure determine what you need to do.
As an employer, you need to understand the federal and state filing requirements for the ACA. Each requirement has its own deadline. Stay informed about these deadlines to avoid noncompliance and potential penalties. You typically need to take action to meet these requirements. For specific details and how these requirements apply to your company, consult your counsel.
Forms 1094-B and 1095-B provide information to the IRS and employees about individuals who have at least Minimum Essential Coverage (MEC). These forms apply to companies with fewer than 50 full-time equivalent (FTE) employees. Form 1095-B includes the type of coverage, covered dependents, the coverage period, and other personal information.
Unlike fully insured plans, you (the employer) must file and provide these forms, not the insurance carrier. Currently, we do not support this requirement. However, UHC level-funded plans have access to Mineral, which may help with this requirement.
For forms 1094-C and 1095-C, we support this requirement for groups with Gusto-managed benefits. Find information on fully insured plans and these forms here.
Certain states require residents to maintain qualifying health coverage. To enforce these mandates, states typically require plans to file health coverage information, like Form 1095-B, with the state and provide copies to residents. You’re responsible for completing these requirements for level-funded plans. UHC level-funded plans have access to Mineral, which can help support some of these requirements.
Most states with individual mandates require filing federal Forms 1095-B and 1095-C, but Massachusetts has its own requirements.
Massachusetts health coverage requirements
The 1099-HC form proves health insurance coverage for Massachusetts residents. It shows who had coverage and for how long. All insured Massachusetts residents typically receive this form each year.
Employers with level-funded groups must file their own 1099-HC forms and provide them to residents. With fully insured groups, the insurance carrier handles this. The 1099-HC is specific to Massachusetts and differs from the federal Form 1095 used in other states. Neither Gusto nor Mineral supports this requirement for UHC level-funded plans. However, you can find resources on the Mineral platform.