Under a level funded plan, an insurance company actuarially determines a funding amount for the year based on the employer's prior experience, just like a self-funded plan. Then, during the year, the employer pays a fixed amount to an insurance company every month (some of which is likely collected from employees through payroll deductions) to pay for claims, fixed costs, and administrative expenses. This regular, equal payment is why the product is called a “level” funded plan. At its core, level funding (sometimes called partially self-funding) involves the employer taking on more risk for claims than a fully insured plan. However, it provides more financial predictability and less risk than paying claims directly, like a typical self-funded plan.
After the end of the year, the insurance company compares the claims paid to the amount contributed by the employer. If the total claims, costs, and expenses are less than the employer's contributions for the year, the employer gets a refund. However, if the total claims, costs, and expenses are more than the employer's contributions, the insurance company covers the shortfall. The greater financial predictability and lower dollar threshold makes level funding particularly attractive to smaller employers.
ACA Filing Obligations
The Affordable Care Act (“ACA”) requires that Applicable Large Employers or ALEs (generally over 50 full-time equivalent employees) and small self-funded/level-funded groups (under 50 full-time equivalent employees) file and distribute certain tax forms. These forms are intended to tell the IRS if the employer complied with certain ACA requirements and help the IRS determine if individuals are eligible for tax credits to buy individual coverage. The tax forms are completed by the employer each year and reflect the employer's offer of coverage. Please keep in mind that these ACA filings are federal tax forms regulated and enforced by the IRS like all other required tax filings. Failure to file accurate ACA tax forms can carry heavy federal penalties for all employers that are separate and apart from the shared responsibility/employer mandate penalties that apply only to ALEs.
ACA Tax Filings for Under 50 Self- and Level-Funded Plans
Many smaller employers that are not ALEs do not believe they need to file any forms. However, if they sponsor a self-funded plan (including a level-funded plan), they are required to file these B Forms. A non-ALE with self-insured coverage will use these B Forms to report enrollment information. The C Forms (described below) are only intended to be used by ALEs.
Large Group/ALE Self- and Level-Funded Plans
See instructions here. Because ALEs file these C Forms, they do not have to also file the B Forms.
What is the reporting deadline?
Reporting to employees is required by the end of January following the reporting year. While this date has been extended automatically by the IRS in prior years, there is no guarantee that the IRS will grant an automatic extension this year. Thirty-day extensions are available upon filing with the IRS. Employers that think they may need more time should work with their tax advisors on filing those requests.
Takeaways
While a level-funded plan can provide some more flexibility than insured plans, and more predictability than a typical self-funded plan, it comes with additional rules to consider. Employers sponsoring level-funded plans should be mindful of their reporting requirements as well as other compliance obligations we mentioned here. Using the correct reporting forms, and filling them out accurately, is an important part of the employer's compliance obligations.
If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization's or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization's specific situation in light of your or your organization's particular needs.