ERISA, FMLA, nondiscrimination rules, and group plan funding: fully insured, self-insured, stop-loss, and ASO

Why this matters

When an employer offers group health coverage, two questions decide almost everything about the plan: which law governs it, and who pays the claims. This lesson covers the federal laws that sit over employer plans (ERISA and FMLA), the nondiscrimination rules, and the four funding arrangements you must be able to tell apart: fully insured, self-insured, stop-loss and ASO.

ERISA: the federal framework

The Employee Retirement Income Security Act of 1974 (ERISA) governs most benefit plans that private-sector employers sponsor. It defines an employee benefit plan as a welfare benefit plan (health, disability, life and similar benefits), a pension benefit plan, or a plan that is both. A group health plan is a welfare benefit plan. A participant is an employee or former employee who is, or may become, eligible for benefits from the plan.

ERISA does not require an employer to offer a plan or set benefit levels. When a plan exists, ERISA requires:

• Fiduciary duties. People who manage the plan or its assets must act solely in the interest of participants and beneficiaries, prudently, and according to the plan documents.
• Written plan and disclosure. Participants receive a Summary Plan Description (SPD) explaining benefits, eligibility and claim procedures. Most larger plans also file an annual report (Form 5500).
• Claims and appeals. Plans must decide claims within set time limits and give a full and fair review of a denial. After that, a participant can sue in federal court.

ERISA does not cover government plans (federal, state or local) or most church plans.

Preemption is the exam favorite. ERISA overrides state laws that relate to employee benefit plans, but a savings clause leaves states free to regulate insurance. The deemer clause says a self-funded plan is not itself an insurer. The result: state mandated benefits and premium taxes reach an insured plan through the insurance policy, but they generally do not reach a self-funded ERISA plan.

FMLA: keeping coverage during leave

The Family and Medical Leave Act (FMLA) applies to private employers with 50 or more employees (and to all public employers and schools). An eligible employee has worked for the employer for 12 months and at least 1,250 hours in the past 12 months, at a site with 50 employees within 75 miles.

• Up to 12 workweeks of unpaid, job-protected leave in a 12-month period for: birth and care of a newborn, adoption or foster placement, the employee's own serious health condition, care of a spouse, child or parent with a serious health condition, or a qualifying military exigency.
• Up to 26 workweeks in a single 12-month period to care for a covered servicemember with a serious injury or illness.
• The employer must continue group health coverage on the same terms as if the employee were working. The employee keeps paying their usual share.
• For foreseeable leave for a birth or placement, the employee gives at least 30 days' notice, or as much notice as is practicable.

FMLA leave is not a COBRA qualifying event by itself. COBRA applies if the employee does not return to work.

Nondiscrimination rules

Two different kinds of rule appear on the exam:

1. Health-status nondiscrimination (HIPAA, as expanded by the ACA). A group health plan cannot base eligibility, or charge one person more than similarly situated people, because of a health status-related factor: medical condition, claims experience, medical history, genetic information, evidence of insurability or disability. Plans may still distinguish between real employment classes, such as full-time and part-time workers.
2. Favoring the highly paid (tax rules). A self-insured medical plan may not discriminate in favor of highly compensated individuals in eligibility or benefits (Internal Revenue Code section 105(h)). If it does, those highly paid people are taxed on the excess benefit. Cafeteria plans under section 125 have similar tests.

Funding: who bears the claim risk?

• Fully insured. The employer buys a group policy and pays a fixed premium. The insurer bears the claim risk. Because it is an insurance contract, state law applies: mandated benefits, premium taxes, rate and form filing.
• Self-insured (self-funded). The employer pays claims from its own assets or a trust, so the employer bears the risk. The upsides are cash flow, no premium tax and freedom from state mandates through ERISA preemption. The downside is exposure to a large or unpredictable claim year.
• Stop-loss. Insurance that a self-insured employer buys to cap its risk. Specific stop-loss reimburses the employer when one person's claims pass a set attachment point. Aggregate stop-loss reimburses when total plan claims pass a set limit (often about 125% of expected claims). Stop-loss reimburses the employer, not the employees, and it is not health insurance for the participants.
• ASO (Administrative Services Only). The employer hires an insurer or third-party administrator (TPA) to process claims, provide its provider network and run customer service for a fee. The administrator takes no claim risk. ASO is how a self-insured plan is usually run day to day.

Memory hook: premium = insurer's risk; claims paid by employer = employer's risk; stop-loss = the employer's safety net; ASO = paperwork only.