What Is a Fully Funded Insurance Plan?
Discover fully funded insurance plans, their structure, and how this traditional model manages financial risk for businesses.
Fully funded insurance plans are a common approach for employers providing health benefits. In this model, an insurance carrier assumes the financial responsibility for healthcare costs, simplifying benefit administration for businesses by transferring financial risk.
Defining a Fully Funded Plan
Employers pay a fixed monthly premium to an insurance carrier. This premium covers administrative costs, claims expenses, and the insurer’s profit margin. The carrier then pays for all covered medical claims incurred by employees.
The financial risk for healthcare costs rests entirely with the insurance company. If claims exceed premiums, the insurer absorbs the cost; if claims are lower, the insurer retains the difference. This structure provides employers with predictable benefit expenses, as their commitment is limited to regular premium payments.
Premiums are considered a tax-deductible business expense for the employer. For employees, benefits received through a fully funded health plan are not considered taxable income. This tax treatment aligns with general provisions for employer-sponsored health coverage.
Key Characteristics
These plans offer predictable monthly costs. Employers pay a set premium regardless of claims experience. This predictability assists businesses with budgeting and financial planning, as healthcare expenditures become a fixed operating expense.
Administrative simplicity is also a key feature. The insurance carrier manages claims processing, network management, provider negotiations, and customer service. This offloads administrative burdens from the employer.
State regulations govern these plans. State insurance departments oversee solvency, approve policy forms, and ensure compliance with consumer protection laws. This framework includes mandates for certain benefits or coverage levels, such as mental health care or maternity benefits required by most states.
Comparison to Other Funding Models
Fully funded plans differ from self-funded models primarily in how financial risk is handled. With self-funded plans, the employer directly assumes financial responsibility for employee medical claims, allocating funds to pay claims as they arise instead of paying premiums to an insurer.
Self-funded plans involve the employer contracting with a third-party administrator (TPA) for claims processing and network access. While fully funded plans are state-regulated, self-funded plans are governed by federal law, the Employee Retirement Income Security Act of 1974 (ERISA). This federal oversight provides more flexibility in plan design compared to state-mandated benefits.
Level-funded plans are a hybrid of fully funded and self-funded models. An employer pays a fixed monthly amount, similar to a fully funded premium. This payment is divided into components for administrative fees, stop-loss insurance premiums, and a claims fund. The claims fund portion is used to pay for actual medical claims.
In a level-funded plan, if claims are lower than the amount allocated to the claims fund, the employer may receive a refund of the surplus. If claims exceed the allocated amount, stop-loss insurance protects the employer from excessive financial exposure. This contrasts with fully funded plans, where the insurer retains all surplus and absorbs all losses, and self-funded plans, where the employer bears all direct claims risk.