We sponsor a fully insured group health plan and are considering a self-insured or level-funded plan. Would this impact our compliance obligations?

April 09, 2025

In short, yes. Self-insured plans have compliance obligations in addition to what is required for fully insured plans. As a reminder, a level-funded plan is considered a self-insured plan for benefits compliance purposes. Therefore, a plan transitioning from a fully insured plan to a self-insured or level-funded plan should be aware of the additional compliance obligations, including (but not limited to) requirements under the ACA, HIPAA, ERISA, Section 105 nondiscrimination rules, and federal transparency rules.

With respect to the ACA, the employer would have additional ACA reporting obligations. For example, an applicable large employer (ALE) with 50 or more full-time employees in the prior year needs to provide information regarding individuals enrolled in the plan on Forms 1094/5-C (in Part III). A small employer (non-ALE) needs to report individuals enrolled in the plan using Forms 1094/5-B or they can utilize Forms 1094/5-C. This can be a big change for a non-ALE who did not have any reporting obligation as a fully insured plan. So, if a non-ALE changes funding type, it is important to engage with an ACA reporting vendor as soon as possible to ensure the information is captured and tracked throughout the plan year.

The employer would also be responsible for reporting and paying the PCOR fee to the IRS. Carriers pay and report the fee for fully insured plans, but self-insured or level-funded plans must handle it on their own. PCOR reporting is handled on Form 720, and the fee is based on the average number of lives for the plan year. PCOR reporting is due on July 31 of the year following the last day of the plan year.

With respect to HIPAA, the self-insured or level-funded plan would have to comply with the full range of HIPAA privacy and security obligations, including providing a HIPAA privacy notice (previously provided by the carrier under the fully insured plan), conducting a risk assessment, implementing more extensive privacy and security procedures, and training staff. Level-funded plans often feel similar to fully insured plans and plan sponsors may remain “hands-off" with respect to receipt of PHI, but they must still comply with the full range of HIPAA obligations.

Under ERISA, if the employer is holding plan assets in a segregated account, the plan would generally be considered funded and subject to the ERISA trust and fidelity bond requirements. If the plan is considered funded, then the exemption from the Form 5500 filing requirements for a small plan (with less than 100 participants at the plan year start) would no longer apply. Furthermore, if the plan receives a refund, any portion considered plan assets (such as amounts attributable to participant contributions towards premiums) must be returned to the plan participants (like an MLR rebate for a fully insured plan) in some manner.

The employer sponsoring the self-insured or level-funded plan may also have ERISA fiduciary obligations regarding claim appeals (which were previously assumed by the carrier under the fully insured plan). Additionally, the plan would no longer be subject to state insurance laws, such as coverage mandates, because these would be preempted by ERISA.

Section 105 nondiscrimination rules will apply to both self-insured and level-funded plans, in addition to the Section 125 nondiscrimination rules to which the plan is likely familiar. Under these Section 105 rules, self-insured health plans cannot discriminate in favor of highly compensated employees (HCEs) with respect to eligibility or benefits. For this purpose, “highly compensated” includes the top 25% of the employer’s workforce, which is a broader definition than that found in Section 125 nondiscrimination rules (which apply to all cafeteria plans). Section 105 rules can be a bit more restrictive than Section 125 rules when it comes to allowable benefit variances, so it is important to plan ahead if the employer already allows varying contributions or eligibility criteria depending on employee class.

Federal transparency rules have levied additional reporting requirements on plan sponsors as well. While fully insured plans are subject to RxDC reporting and gag clause attestation reporting requirements, the carrier often handles it for the employer. Self-insured and level-funded plans may receive reporting help from their TPA, but it is important to confirm what the TPA will handle when entering into that arrangement. Similarly, under MHPAEA, while all plans are subject to comparative analysis requirements, funding type will determine which entity is responsible for completing the analysis. Insurers (along with the employer sponsoring the fully insured plan) are responsible for the comparative analysis for fully insured plans. However, the plan sponsor bears responsibility for the self-insured or level-funded plan. In many cases, the TPA may be able and willing to assist, but employers should confirm whether the TPA will handle this requirement.

Although not an exhaustive list, as you can see above, changing funding types can add quite a few additional compliance obligations to employers’ plates. Therefore, employers considering a change from a fully insured to a self-insured or level-funded plan should consult with legal counsel and their advisors for further information regarding the additional compliance requirements.