Most employers, whether they sponsor a fully-insured health plan or a self-funded health plan, require their employees to contribute to the cost of medical benefits. Many employers that self-fund their health plan ask whether employee contributions can be used to pay stop-loss premiums.
In a fully-insured health plan, the employer pays insurance premiums to an insurance company, and the insurance company assumes the obligation to pay the claims of the plan’s participants.
In a self-funded health plan, an employer assumes the obligation of paying medical claims for the plan’s participants.
Stop-loss insurance is often used in self-funded health plans. It reimburses the employer for costs in excess of a certain amount. Stop-loss insurance protects an employer against catastrophic claims. It is a way for an employer to limit its exposure.
It is important to understand that stop-loss insurance is not health insurance. The stop-loss insurer has no obligation to pay claims. It simply reimburses the employer for claims paid by the employer out of its own assets. The employer’s obligation to pay claims is not affected by stop-loss insurance. The employer is responsible for paying claims whether the employer has stop-loss insurance or not. The employer, not the plan, is the policyholder.
Generally, the employer will pay stop-loss insurance premiums out of its general assets, even if the employer requires its employees to contribute to the cost of medical benefits. The reason is simple. Employee contributions are plan assets and subject to ERISA.
In 2015, the Department of Labor (the “DOL”) was asked by an employer “whether stop-loss insurance policies purchased by a plan sponsor to manage risk associated with a self-insured contributory welfare plan would constitute plan assets.” The employer asked DOL because DOL is charged with enforcing ERISA. If stop-loss policies are considered “plan assets,” it might cause problems under ERISA’s prohibited transaction regime, because the employer would be using plan assets for its own purpose.
In Advisory Opinion 2015-02A, DOL wrote that, under the circumstances described by the employer, the stop-loss policies would not be considered plan assets. The DOL gave the following reasons in support of its determination:
The single, biggest take-away from DOL Advisory Opinion 2015-02A is that an employer cannot use employee contributions to pay stop-loss premiums. Employee contributions are plan assets, and, if those funds are used to pay stop-loss premiums, then the stop-loss policy is also a plan asset.
There are a number of ways that an employer can ensure that employee contributions are not used to pay stop-loss premiums. A simple approach is to establish separate bank accounts; one that includes both employer and employee contributions and is used solely to pay medical claims, and another that is used to pay stop-loss premiums and is funded solely from the general assets of the employer.
It is not clear whether the employer who requested the advisory opinion actually established separate accounts. DOL simply said that the employer has “put in place an accounting system that ensures that the payment of premiums for the Policies includes no employee contributions”.
Whatever method a plan sponsor employs, it is imperative that no employee contributions be used to fund stop-loss insurance premiums. Stop-loss premiums must be paid solely from assets of the employer. The best way to ensure that no employee contributions are used to pay stop-loss premiums is to segregate employee contributions from the monies used to pay stop-loss premiums.