March 4, 2015

The Tug of War: Can Small Employers Self-fund? (article)

The Tug of War: Can Small Employers Self-fund?

The District of Columbia is following a growing trend to regulate stop-loss insurance available to small employer health plans. 


Stop loss insurance is often purchased by employers who sponsor self-funded health plans.  It is intended to protect an employer in the event of large claims.  Historically, only large employers have self-funded their health plans.  As health care costs have increased, more and more small employers have begun considering self-funding. 


Some regulators and legislatures have expressed some angst over this concept.  Several years ago, the National Association of Insurance Commissioners (NAIC) adopted a Stop Loss Insurance Model Act setting out guidelines.  The NAIC Stop Loss Model Act contains the following minimum attachment points:


  • For large employer groups over 50 employees: 110% aggregate and $20,000 specific attachment point 
  • For groups under 51, the aggregate attachment point must be at least the greatest of:
  •  $4,000 times the number of group members
  • 120% of expected claims; or 
  • $20,000.

States are not obligated to follow the model rules but many do.  In fact, three states: Oregon, New York, Delaware and now the District of Columbia outright prohibit the sale of stop loss insurance to small employers.  The requirements of these restrictions vary greatly; for example, Delaware restricts the issuance of stop loss insurance only to employers employing fewer than 15 employees. 


The District of Columbia enacted a stop loss law on January 25, 2015 which, in effect, precludes small employers from self-funding comprehensive health coverage in that stop loss coverage can’t be issued to a small employer unless it has an insured health plan product. Small employers in the District can only purchase health coverage through the District’s marketplace (DC Health Link) and can only self-fund excepted benefits for which stop-loss can be purchased. The minimum attachment points for stop-loss insurance policies issued in the District are:

  • Minimum $40,000 individual attachment point;
  • Aggregate attachment point to be at least the greater of: 
    • $5,000 times the total number of group members; 
    • 120% of expected claims; or 
    • $40,000. 

The premise behind these stop loss laws is presumably not only financial protection to affected individuals and entities; but also to ensure employees of small employers have access to what is deemed to be adequate coverage.  States cannot regulate stop loss insurance as health insurance, i.e., state mandates cannot be imposed on stop loss insurance.  However, a state can regulate the stop loss insurance as a general insurance product imposing the kinds of limitations described above.  It will be interesting to see how this trend plays out in the years to come.

The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.  

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