As healthcare costs continue to rise, many employers are looking for lower-cost health plan options. Many small employers have adopted level-funded plans, an alternative to fully insured small-group health insurance. In this article, we'll cover the major differences between fully insured and level-funded plans, as well as compliance considerations when moving into level-funded plans.
If you're not sure whether your company's coverage is level-funded: Check the name of your medical plan in the Benefits section of your Gusto account. If it says "level-funded" in the name, you're in the right place. If not, your plan is fully insured and this article does not apply to your plans.
Unlike fully insured plans, where premiums are uniform across all groups, level-funded premiums are based on your group's historical healthcare utilization. This approach can lead to savings of 10-20% compared to fully insured plans.
Another difference is that there are a few additional compliance requirements. To help you get started in your level-funded journey, click here for compliance deadlines. (Note: This is not comprehensive of all requirements applicable to your company.) Although Gusto assists with many of the compliance requirements, some are not supported by Gusto at this time. For those requirements, we partner with BASIC to assist. To learn more about services offered by BASIC, email [email protected].
How rates can change at renewal
Level-funded plans incentivize employers to support employee health and well-being, potentially resulting in more favorable rates. If your team submits fewer healthcare claims, you might get a rebate at the end of the year (criteria and eligibility vary by carrier). But if claims are higher than expected, your renewal rates could go up. The good news is that once your plan year starts, your monthly rates are locked in until renewal, no matter the number of claims.
Fully insured vs. level-funded
Here are some key differences between these two approaches to group health insurance.
| Fully insured | Level-funded |
|---|---|
| Most common type of small employer group sponsored insurance. | Growing popularity to combat rising healthcare costs. |
| Premium rates are standard because they're based on community rating. | Premiums are based on group’s historical utilization. |
| Small and large groups. | Small and large groups. |
| Fewer compliance requirements on employer. | Additional compliance requirements on employer. |
Stop-loss (or ‘excess-loss’) bridges the gap between the total claims cost and the claims pool. Stop-loss insurance is a separate policy from your health plan. In a level-funded plan, the stop-loss policy ensures that you will never pay more than the fixed monthly premium throughout the plan year, regardless of actual healthcare claims.
Carriers typically bundle stop-loss insurance into their level-funded plan product that you purchase. It is already included in your bundled pricing which means that your monthly premiums will remain static, month by month.
Rules about continuation coverage for Level-funded plans depend on the number of full-time employees.
Employees are only eligible to enroll in lines of coverage they were actively enrolled in at the time of termination (i.e. if they previously waived dental coverage, they can’t enroll in dental COBRA coverage). However, if they were previously enrolled in more than one line of coverage (i.e. medical and dental) they can choose which lines to continue from the options available (i.e. continue medical and drop dental).
If Gusto's the broker of your insurance benefits, we help determine whether your company is subject to federal or state continuation.
Whether a company is subject to federal COBRA or state continuation is generally determined by the number of full-time and full-time equivalent employees you have.
Eligibility
Remember: Level-funded groups are not eligible for state continuation. If your group also has <20 employees and doesn’t fulfill the above eligibility for COBRA, your group will not have any continuation.
This section applies if your company is eligible for Federal COBRA (20+ full-time employees).
If your health benefits are managed by Gusto, or you have the broker integration and COBRA add-on, here’s what to expect when an employee leaves the company.
Remember: if you do not want to enroll in COBRA, you can also shop plans on the individual marketplace. If you’re eligible, you can also enroll as a dependent on a spouse or parent’s existing plan. The termination of your current coverage is a qualifying life event that allows you to enroll outside open enrollment.
We’ll provide an administrator, BASIC, for companies subject to COBRA to make sure that employees are handled correctly. For companies who offer benefits with Gusto there is no additional cost.
If your company chooses not to use BASIC, you’ll be responsible for finding a third-party administrator to handle all aspects of COBRA.
If your employee is enrolled in benefits and leaves your company, here’s what to expect:
Employees are only eligible to enroll in lines of coverage they were actively enrolled in at the time of termination (i.e. if they previously waived dental coverage, they can’t enroll in dental COBRA coverage). However, if they were previously enrolled in more than one line of coverage (i.e. medical and dental) they can choose which lines to continue from the options available (i.e. continue medical and drop dental).
This section applies if your company is on a Level-funded plan and ineligible for Federal COBRA and state continuation (< 20 full-time employees).
If your company is ineligible for both state continuation and Federal COBRA, we recommend your former employees to seek coverage through our partner, Stride, which is a resource for finding coverage in the marketplace. They’ll receive help with enrollment and find subsidies that your employees may be entitled to. They also have an online portal where employees can change coverage, make payments, and renew their plans.
As the employer, unfortunately, there is no way to optionally offer medical continuation coverage if you are on a level-funded plan and ineligible 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 ACA and is a filing fee that applies to Level-funded plans. For level-funded health plans, the employer is responsible for determining the total fee amount owed and remitting payment to the IRS. The payment is due annually by July 31 for plans ending in the previous year.
You can also choose to use a third-party administrator, such as our partner, BASIC, to handle these calculations for you.
How much is the fee?
The PCORI fee is a set dollar amount that is fixed by the IRS that is adjusted each year. The total fee amount is calculated by multiplying the annual PCORI fee amount by the number of eligible employees for that plan year. See below to learn how to calculate the fee.
Check the IRS website for the most up-to-date deadline and fee information.
To remain compliant with the PCORI requirements, you must:
There are three methods you can use to calculate the average number of eligible employees. To file a Form 720, you will need to report the average number of lives covered by your level-funded health plan. The average number of covered lives is the average number of employees eligible to participate in the plan.
Below are the method options used to calculate total fees which you will use to complete Form 720:
The IRS provides instructions on how to fill out the Form 720.
There are a couple different ways to fill out and send the form. It is best to consult with a tax professional before completing and submitting Form 720.
Since employers may need to fill out other sections of the form for other business purposes, it’s best to consult with a tax professional before completing and filing 2nd quarter Form 720.
The purpose of annual non-discrimination testing (NDT) is to ensure that covered plans do not discriminately favor highly compensated employees (HCEs). You may be familiar with completing NDT for applicable cafeteria plans under IRC Section 125. Once your health plan becomes level-funded, there are additional nondiscrimination requirements under IRC 105 (h). Level-funded plans are subject to both NDT requirements under section 125 AND section 105(h).
When does testing occur?
NDT needs to be completed before the end of the plan year; however, it’s strongly recommended to complete this requirement mid-year in case any corrective actions are needed.
Gusto partners with BASIC for additional compliance services that Gusto doesn’t support today.
Under IRC section 105(h), there are two tests to be completed:
Highly compensated employees (HCEs):
Excludable employees:
In a level-funded plan, you may be eligible for a year-end rebate. This depends highly on how many claims or how costly claims are for your group throughout the year. If the claims are lower than expected and fulfill certain criteria with your carrier, you may receive a rebate. If applicable, the rebate will come directly from your carrier, not Gusto.
If all criteria for the rebate are met, there are certain provisions you must follow and carefully consider when receiving and distributing the rebate. Below we provide a few considerations. However, we strongly recommend that you speak with your legal counsel or tax advisor.
Under the Employee Retirement Income Security Act (ERISA), level-funded plans are required to file the Form 5500 series. The purpose of this filing is to make sure that the health plan is being administered and operated appropriately. Many groups may be exempt from this requirement. It is up to you as the employer to make this determination.
To complete the filing or if you are unsure whether or not you are exempt, you should work with your legal counsel and/or your tax advisor.
If needed, Gusto partners with BASIC for additional compliance services such as completing the 5500 requirement.
When is it due?
The Form 5500 Filing is due the last day of the seventh month after the plan year ends. If your group’s plan year follows the calendar year, the filing is due July 31st. If your group needs more time, an extension may be granted; however, you must file IRS Form 5558 by the same deadline.
Am I exempt?
There are several criteria to fulfill to be exempt from this filing. This includes (but it is not limited to): having a IRC Section 125 Cafeteria Plan, remitting premium payments to carriers directly and quickly, having fewer than 100 employees. If you have more than 100 employees, you are generally required to complete this filing regardless of the plan being level-funded or fully insured.
If you think you may be exempt, please reach out to your legal counsel and/or tax advisor to confirm. Gusto cannot make this determination on your behalf.
To help guide you on some of the existing regulations, please refer to our Benefits Compliance Checklist. Please keep in mind that this checklist applies to small group health insurance as well so there may be items that do not apply to level-funded plans, like state continuation (mini-COBRA). In those cases, differences are outlined above!
If there is doubt or any areas where Gusto cannot support, you should always refer to your legal counsel or tax advisor(s). There are nuances of going level-funded where they would be best suited to help you.
For employer responsibilities not supported by Gusto, we partner with BASIC to assist. To learn more about services offered by BASIC, email [email protected].