The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law designed to protect the interests of employee benefit plan participants and their beneficiaries. While ERISA applies to various types of employer-sponsored benefit plans, its application to self-funded health and disability plans is particularly significant and is not well understood. Understanding how ERISA governs self-funded plans can be vital to ensuring that you can adequately protect the rights to which you are entitled as a plan participant or beneficiary under an ERISA plan.

What is a Self-Funded Plan?

A self-funded (or self-insured) health and disability plan is one in which the employer assumes the financial risk for providing healthcare and disability benefits to its employees. Unlike fully insured plans, where an insurance company underwrites the policy and bears the risk, a self-funded plan means the employer directly pays any benefits. Often, employers will contract with third-party administrators (TPAs) to handle claims processing and administrative duties, but the financial responsibility remains with the employer.

Key ERISA Provisions for Self-Funded Plans

1. Preemption of State Laws: A prominent feature of ERISA is its preemption clause – as federal law, ERISA, rather than state law, governs employee benefit plans. It also exempts employers from state insurance regulations. This aspect of ERISA benefits self-funded plans by allowing employers to operate with uniform expectations, and therefore higher efficiency, regardless of what state they are in. Because they are not typically considered insurance under state laws, these plans are generally not saved from preemption.
2. Fiduciary Duties: ERISA imposes stringent fiduciary responsibilities on those who manage and control plan assets. Fiduciaries must act solely in the interest of plan participants and beneficiaries. This includes adhering to prudent management practices, avoiding conflicts of interest, and ensuring that plan assets are used appropriately. For self-funded plans, the employer or designated fiduciaries must be diligent in meeting this duty; when an employer breaches a fiduciary duty owed to an employee, the employee may pursue its damages directly from the employer, as opposed to an insurance company or third party.
3. Plan Documentation and Reporting: ERISA mandates comprehensive documentation and reporting requirements for self-funded plans. For example, plan participants must be provided with a Summary Plan Description as well as information about any updates or amendments to the plan, and a report of the Plan must be filed every year with the Department of Labor.
4. Claims and Appeals Procedures: ERISA requires self-funded plans to establish fair and transparent claims and appeals procedures. Plans must give participants a process for filing claims and appealing denied claims. The purpose is to ensure that each claim gets a full and fair review.

Advantages and Drawbacks of Self-Funded Plans under ERISA

Many employers choose self-funded plans based on the advantages they offer under ERISA, including:

1. Cost Savings: Fully insured plans include factors that employers can avoid by self-funding, like insurance profit margins, risk charges, and administrative costs. This tends to be particularly beneficial to large employers with predictable healthcare expenses.
2. Plan Customization: Self-funded plans allow employers to obtain coverage that fits their specific needs, including features unavailable in fully insured plans, like wellness programs or disease management initiatives.
3. Control Over Plan Design: Employers have more control over the terms and conditions of the plan, allowing them to make decisions that best align with their business objectives and employee needs. This includes determining coverage levels, provider networks, and cost-sharing arrangements.
4. Cash Flow Benefits: Self-funding can save employers substantial money in high insurance premiums, allowing them to put the money they would otherwise spend on premiums to better use.
5. Preemption of Adverse State Laws: Self-funded plans are typically not governed by state laws that otherwise apply to insured plans.

While self-funded plans offer numerous benefits, they also present challenges that employers must navigate to ensure compliance and effective plan management:

1. Financial Risk: The main issue with self-funded plans for employers is the assumption of financial risk. Employers must be prepared to cover unexpected high-cost claims, which can be particularly challenging for smaller employers.
2. Regulatory Compliance: Maintaining compliance with ERISA’s fiduciary duties, reporting requirements, and claims procedures can be complex and challenging. Employers must stay informed about regulatory changes and ensure their plan administration practices meet ERISA’s standards.
3. Administrative Burden: Managing a self-funded plan requires significant administrative effort. Employers often rely on TPAs for claims processing and plan administration, but they must still oversee these activities to ensure compliance and effective plan operation; self-funded employers may be held liable even when a TPA is at fault for violating a claimant’s rights.

For employers, self-funding a plan may have both benefits and drawbacks. Self-funding allows employers more flexibility with plan design and can help keep premium payments as low as possible. However, self-funding employers also take the risk of having to cover unpredictable and expensive claims. If you or someone you know has brought a claim under a self-funded ERISA plan that you think has been improperly denied, reach out to the McKennon Law Group PC for a consultation at no charge.