The Basic Criterion of Self-Funded Plans
In a self-funded plan, the employer assumes the financial risk for providing health care benefits to the plan participants. Though the employer will typically contracts with a third party administrator to assist in the administration of the plan, the employer bears the risk of plan solvency. Likewise, though an employer may purchase stop loss insurance, the employer bears the risk of plan solvency. In other words, the employer is responsible for claims under the plan regardless in a true self-funded plan. See Tri-State Machine, Inc. v.Nationwide Life Ins. Co., 33 F.3d 309, 315 (4th Cir. 1994); Thompson v. Talquin Bldg. Prods. Co., 928 F.2d 649, 653 (4th Cir. 1991).
Still, the question remains – how does an outsider to plan administration ascertain the self-funded status of a plan? For example, if an attorney representing a personal injury plaintiff receives a letter from a representative of the plan, how does the attorney know if the plan is self-funded or not? The consequences may be extremely significant since most States limit, and in some cases, prohibit, subrogation. These State laws are preempted if the plan is self-funded.
Form 5500 Filings
Often offered as a solution, the inquiring as to the filing of Form 5500’s is a good starting point for determining whether a plan is a self-funded ERISA plan.
The plan participant (perhaps not the participant’s attorney, according to some cases) is entitled to request the most recent Form 5500 under 29 U.S.C. 1024(b)(4). [For more information on this, see my ERISA Plan Information Requests Series]
While you wait for the plan administrator to send it (and you do want to ask the “plan administrator” (not the claims administrator), you can check Freeerisa.com and take a look at what is available there. [Since I originally wrote this, a new resource has become available – you can now use the DOL Form 5500 datebase – click here. (Ed. RFH 11/12/14)]
For more information on plan reporting and disclosure requirements, the DOL has published a good resource in the form of a booklet.
The Form 5500 will have a section, Box 9, that indicates the plan funding arrangement. If the form says “general assets of the employer”, that suggests a self-funded plan. If it says “insurance”, that suggests a fully insured plan. (Fully insured plans may still be ERISA plans, but the preemptive force of ERISA Section 514 only applies with its full force and effect in the case of self-funded ERISA plans.)
But evaluation of the Form 5500 is not conclusive.
Errors In Form 5500 Filings
First, some employers do file Form 5500’s that really do not need to. For example, governmental employers are excluded from ERISA coverage. They used to file a Form 5500-G, but that is ancient history. Now they need file nothing. So why would a governmental entity file a Form 5500? By mistake most likely, whether by the entity’s form preparers or the entity itself in its classification.
Understanding what is an governmental entity for ERISA purposes is a topic beyond the scope of this article (see How To Identify An Exempt Governmental Plan), but the issue can be complicated. For now, assume that any entity that purports to serve the public in some fashion and appears to have some element of government control should be evaluated for exemption from ERISA as a governmental entity. On the other hand, just because such an entity files a Form 5500 does not mean that the plan is necessarily an ERISA plan.
Further, be aware that it is not unusual for form preparers to indicate “insurance” as a source of administration when the plan is actually self-funded. These mistakes do happen and are not as uncommon as they should be.
Also, as noted in the “Who Must File” section of the Form 5500 Filing Instructions, certain plans with under 100 participants as of the beginning of the plan year and that are unfunded, fully insured, or a combination of insured and unfunded may not have filed a Form 5500. Cf., DOL Technical Release 92-01, 57 Fed. Reg. 23272 (June 2, 1992) and 58 Fed. Reg. 45359 (August 27, 1993). Whether this exclusion applies or not is for expert evaluation, but for our purposes here, it just adds another reason that the Form 5500 filing or not cannot be viewed as the final answer in evaluation of ERISA self-funded plan status.
Statements in Plan Document and SPD
What the document says is not the final word. Insurance companies rank first among plagiarists. Summary plan descriptions are frequently copied from the forms used by the prior administrator. So, what is in the document is useful, in a forensic sense, but not determinative in a legal sense.
Nonetheless, plan documents should have a section that refers to the type of plan administration. That section will typically state “contract administration” in the case of a self-funded plan, and “insurance” in the case of a full insured plan.
Evaluation of the Parties Involved
Experience with the parties involved in the plan administration constitutes a very helpful criterion for those with a background in the self-funded health plan market. One may find some indicators here by checking State licensing information and gathering some information on how the entity is licensed and what policy forms they may have on file with the State insurance department. If claims are paid by a third party administrator (as opposed to an insurance company), and the TPA is licensed as such with the State insurance department, then that is an indication that the plan is self-funded.
Yet, insurance companies can also pay claims for self-funded plans through “administrative only” agreements. Thus, you cannot rely on the fact that an insurance company versus a third party administrator is adjudicating claims. You can, however, evaluate the ASO contract to determine if the employer bears the “insurance risk” for claims under the plan or if the administrator assumes the risk.
Also, one must distinguish self-funded plan arrangements in which the employer obtains stop loss insurance from forms of insurance which may appear very similar. For example, under a “minimum premium” policy, the employer pays a reduced premium to the insurer and assumes the burden of paying off claims up to a certain amount. These policies can again be distinguished from a self-funded plan based upon the allocation of risk. The minimum premium policy bifurcates risk for claims between carrier and plan sponsor based upon the risk retention points. (Cf., Basic Criterion of Self-Funded Plans above.)
Note: Because of the many parties that may be involved in the administration of a group health plan, it is important to seek information from the plan administrator (as defined), and ensure that the party providing information is authorized to represent the plan in the transaction as opposed to merely one of the service providers, such as the stop loss carrier.
Multiple Employer Welfare Arrangements
Adding another layer of confusion, one must ensure that, even if a plan that is undeniably self-funded, it does not constitute a MEWA. If it does, virtually every defense against State law regulation is removed. Further, a MEWA will often constitute a non-ERISA plan such that it is entitled to no deference whatsoever by ERISA considerations. For information on this subject, please refer to the MEWA page. In short, if the plan purports to be sponsored by multiple employers, an association of any kind, including a leasing organization or a “professional employer organization”, think twice before conceding ERISA status even if the plan is “self funded”.
The first criterion set forth above is actually the best litmus test for determining whether a plan is an ERISA self-funded plan or not. Evaluation of the form of benefits funding by reference to the Form 5500, the plan documents, the type of entity and the administrative arrangement will support a finding in this regard. In the final analysis, the conclusion will be clear in many cases, but some will present complex questions. This is particularly true in the situation of exempted employers, such as governmental or church plans, and multiple employer arrangements. While the foregoing analysis will not assure a correct result, consideration of the enumerated factors together should provide an accurate assessment in most cases, and where there remains doubt, assistance should be recruited from a colleague more familiar with such issues.