Compliance Considerations for Level-Funded Health Plans

OCTOBER 1, 2024

Small employers often face challenges in understanding and complying with various requirements that affect their health and welfare programs. Further, recent trends show that more and more small employers are taking the leap into level-funded plan designs. While these arrangements may provide cost savings and offer more flexibility in plan design, they require additional attention to compliance requirements.

ERISA. The Employee Retirement Income Security Act (ERISA) imposes various requirements on U.S.-based employers that are often heightened for level-funded arrangements, as the insurance carrier does not play the same role as a claim fiduciary to the plan. Among other things, small employers should have plan documents and summary plan descriptions (SPDs) in place and distributed in a timely manner, ensure participants contributions are handled correctly, and understand fiduciary obligations with respect to the plan and plan participants.

ACA reporting. When a small employer (fewer than 50 full-time employees) moves to a level-funded or self-funded arrangement, the employer is responsible for reporting to covered individuals and the IRS on the plan’s provisions of minimum essential coverage (MEC). Reporting MEC is usually done through Forms 1094-B and 1095-B. Forms must be provided to covered individuals by March 2, and filed electronically with the IRS by March 31 for the prior calendar year. This requirement is often overlooked by smaller companies when switching from fully insured to level-funded plans. Employers need to coordinate with payroll vendors to furnish these statements.

PCOR fee. Health plans are required to pay the Patient Centered Outcomes Research (PCOR) fee annually, which helps pay for research into the clinical effectiveness of medical treatments, procedures and drugs. While the insurance carrier pays this fee for fully insured plans, employers with a level-funded plan are responsible for paying the fee to the IRS using Form 720 (due July 31 for the quarter ending June 30). This also applies to health reimbursement arrangements embedded within fully insured plans.

Transparency rules. The Consolidated Appropriations Act of 2021 imposes new reporting requirements for group health plans, including prescription drug data collection (RxDC) and gag clause attestation. Employers with a level-funded plan are responsible for compliance with these requirements — however, for some bundled plans, insurance carriers or third-party administrators (TPAs) may be willing to handle these requirements. Confirm with the carrier or TPA and secure a written agreement if it is willing to submit these on behalf of the plan.

Other Requirements

• Nondiscrimination testing. IRS Code Section 105(h) prohibits discrimination with respect to eligibility and benefits under a self-funded plan — including level-funded — in favor of highly compensated individuals (HCIs). Plans that fail discrimination testing must ensure HCIs include the excess benefits provided in gross income.
• HIPAA privacy and security rules. The Health Insurance Portability and Accountability Act (HIPAA) establishes standards to protect patients’ health information from being disclosed without their knowledge or consent, and includes requirements that pertain to handling and transferring protected health information (PHI). Employers that move to a level-funded health plan will have access to PHI and must ensure HIPAA compliance obligations are met, including (among other things) establishing policies and procedures, obtaining business associate agreements with vendors who may receive, create, transmit or maintain PHI, and furnishing a notice of privacy practices.
• State laws. Some states may impose restrictions on stop-loss coverage that limit certain small employers from offering level-funded plans. There are also some states with an individual coverage mandate that requires separate or additional health and welfare plan reporting.