Self-funding for medical benefits is becoming increasingly popular, but small companies should take precautions.
Self-funding for medical benefits has become so attractive that even quite small companies now consider it. But that popularity is raising calls for increased regulation.
Employees often complain about reductions in coverage when companies switch to self-funding. Self-funded plans must conform only to Employee Retirement Income Security Act (ERISA) regulations, which preempt more comprehensive state laws. For instance, many states require coverage for mental illness, while ERISA does not. Recently, the Supreme Court addressed the problem in the McGann case, in which an AIDS sufferer sued his employer after it amended its self-funded plan to reduce lifetime maximum payments for AIDS treatment from $1 million to $5,000. The court held that ERISA allowed that change. Now Congress may amend ERISA.
To preclude misunderstandings, says Marian Durkin, a lawyer with Briggs and Morgan in Minneapolis, take these steps:
Reserve the right as a fiduciary to interpret and amend the plan. You may be forced to interpret what you will and will not cover. If upset employees sue, and you have not explicitly reserved that right in writing, the court will conduct its own review. You don't want that.
Explain the plan carefully to employees. Third-party administrators (TPAs), which often manage small companies' self-funded plans, provide booklets explaining benefits, but smart companies make an extra effort. Ensure that those explaining your policy deal directly with employees' questions.
Document all decisions. TPAs handle documentation. But review their work periodically. You share the responsibility.
Review common problems and correct them. If employees repeatedly misunderstand eligibility requirements, clarify the policy or get someone else to explain it better.