We sponsor a fully-insured group health plan but are considering changing to a level-funded plan arrangement. Would this transition affect our benefits compliance obligations?

In short, yes. A level-funded plan is often viewed as a blended solution for employers that want to switch from a fully insured plan but are not prepared to completely self-insure. An employer sponsoring a level-funded plan pays a set monthly amount to a carrier to cover the estimated cost of anticipated claims, the stop-loss premium and plan administrative costs. If the claim costs are lower than expected at the plan year-end, a refund may be provided to the employer.

However, a level-funded plan is considered a self-funded plan for benefits compliance purposes. Therefore, a plan transitioning from a fully insured plan to a level-funded plan should be aware of the additional compliance obligations, including (but not limited to) requirements under the ACA, HIPAA, ERISA and the Section 105 nondiscrimination 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 minimum essential coverage on Forms 1094/5-C (in Part III). A small employer (non-ALE) needs to report minimum essential coverage using Forms 1094/5-B.

The employer would also be responsible for reporting and paying the PCOR fee required of carriers and self-funded plans. The reporting on IRS Form 720 and fee based on the average number of lives for the plan year is due on July 31 of the year following the last day of the plan year.

With respect to HIPAA, the 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.

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 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 level-funded 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 level-funded plans, too. Under these 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).

Accordingly, despite the funding differences between level-funded and self-funded plans, the level-funded plans are generally considered self-funded for benefits compliance purposes. Employers considering a change from a fully insured to a level-funded (or self-funded) plan should consult with counsel and their advisors for further information regarding the additional compliance requirements.