The ABCs of Self-Funding Your Health Plan

Self-insurance, sometimes called self-funding, is when your business forgoes traditional insurance coverage and takes on all the financial risk by setting aside money to pay employees’ healthcare claims. Small businesses may consider this option for several reasons, including a lack of negotiating power, resistance by insurance companies to take on the risk of a small pool, and cost-prohibitive premiums that come with offering health insurance. As you can see, with the traditional model, self-insurance only makes sense if you could spread out the risk of those few employees who might have substantial claims throughout the rest of the employees. For that to work, you need many employees – 200 employees is a good number. With a self-insured plan, an employer chooses to pay for individual health claims out-of-pocket instead of a monthly fixed premium to a health insurance carrier.

If your company operates in an industry where employees may suffer frequent injuries, like construction or demolition, you may also consider self-insurance as a way to help reduce high premiums. Not much of a retirement plan and not what he had in mind for his wife’s future. The best we were able to do was advise him as to how much he would have to reduce the death benefit every five years to keep to his available $20,000 to $25,000 maximum premium to allow him to pay for his wife’s retirement benefit. This publication summarizes the new accounting standards with mandatory effective dates in the first quarter of 2024 for public entities, as well as new standards that take effect in annual 2023 financial statements for nonpublic entities.

Consequently, most self-insured entities still obtain insurance to cover the risk of catastrophic losses, while covering all smaller incidents themselves. Additionally, self-insurance provides cash flow advantages when payments are made over the life of the claim instead of paying premium costs up front. The company can invest the difference in the growth of the business or in its investment portfolio.

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Self-insured plans are like stocks – you will have some really good years, some really bad years and a lot in between. The company then harvests all of the premium savings, net of any amount they have to pay between $2,000 and $7,000. This can give the company valuable cash reserves to put into new machinery or expansions. The truth is, many employees will not even burn through the first $2,000 of the deductible. You know (or can find out) about your company’s overall claims experience, to give you an idea of how many employees might exceed this threshold. Also, under the new health care legislation (IRC § 4375), there is a sliding fee per insured for self-insured plans.

  • Begin by calculating your employees’ payroll costs and recording the overall expense as a debit.
  • The Affordable Care Act (ACA) has specific reporting rules for companies that have more than 50 employees.
  • Certain services may not be available to attest clients under the rules and regulations of public accounting.
  • Your company then raises the deductible on the group health insurance plan to the maximum amount they can.
  • Between expenditures and liability, health insurance can be a complicated series of transactions, including how the employee portion of the health insurance premium is accounted for in company ledgers.
  • In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates.

In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see /about to learn more about our global network of member firms.

What About A ‘Partially’ Self-Insured Health Plan?

Because of this large self-insurance risk, BP’s cost of equity capital (risk to cash flows) was higher than most investors recognized. So, if the client lived beyond age 80, there would be no income for the spouse. If you’re self-insured, you’re not paying an insurance company every year to carry the risk of replacing your income if something happens to you. And we’re all about saving money where we can—especially on insurance premiums. But there’s one coverage type—life insurance under very specific conditions—where being your own insurance provider makes a lot of sense!


Very small businesses find it difficult to get affordable health insurance for their employees and look to self-insurance as an option. The benefits broker will also help you find a third-party administrator (TPA), which manages your healthcare plan, ensures compliance, and deals with all claims. Finally, there is a subsection of entities that is forced to retain risk because coverage is not available in the traditional insurance market for a variety of reasons including capital restraints or poor historical performance. Self-insurance is about you working to become your own insurance provider. Say you have a term life insurance policy (which is the only type of life insurance we recommend) that lasted 20 years. When it comes to life insurance, self-insured means having enough in investments to replace your income and provide for your loved ones after you’ve died.

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If the firm’s capital base and free cash flows are sufficiently strong, as with a BP, even a large disaster would not cause failure. The same would be said with a large number of small claims which could seriously impair the capital base, as was the case with asbestos manufacturers. Whether your business requires a traditional audit or accounting and reporting advisory services, Deloitte & Touche LLP’s Audit & Assurance practice works to deliver more than a static snapshot of the past. The standard setters made limited changes to the accounting and financial reporting guidance in 2020, so industry participants have focused mainly on adopting or preparing to adopt the major standards issued previously by the FASB. Accounting Today is a leading provider of online business news for the accounting community, offering breaking news, in-depth features, and a host of resources and services.

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For one, if you have a mortgage, your lender will require you to carry homeowners insurance. But even if your house is paid off, you probably don’t want the risk of having to pay out of pocket to completely rebuild it if it burns to the ground. For small businesses finding it challenging to get affordable health insurance for their employees (which can especially be the case if they’re not using an HR or payroll service), let’s preparing a budgeted balance sheet take a look at how self-insurance works. Self-insurance can be a powerful tool for reducing insurance costs and increasing cashflow, but it comes with risks that should be carefully evaluated. A company would generally be best served producing a robust estimate when recording self-insured liabilities on the balance sheet. In part 2 of our series, we will expand on accounting for self-insured balances and related pitfalls.

A stop-loss policy is typically designed to pay claims that exceed a specific amount of catastrophic medical claims for particular employees. For instance, a company might pay for all medical bills up to $100,000 per employee, and then the stop-loss insurance would pay on any employee medical bills that exceed that $100,000. Compare that to traditional insurance coverage, where you find a reputable insurance provider that offers health coverage to your employees. You don’t have to do any manual calculations or set aside large sums of money for needs that may never arise. You simply pay a pre-negotiated premium each month—split between you and your employees—and, if an employee needs to cover healthcare costs, they submit a claim to the insurance company.

Accounting for Self-Insurance–Theory and Practice

This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. The COVID-19 pandemic has presented insurance companies with several challenges, such as swiftly transitioning to a remote workforce and reassessing their financial goals and market strategies in a contracting economy. In addition, insurers should not overlook the need to manage their potential reputational risks in the midst of this pandemic.

We base these estimates upon an examination of historical trends, industry claims experience and independent actuarial estimates. Although we do not expect that we will ultimately pay claims significantly different from our estimates, self-insurance reserves could be affected if future claims experience differ significantly from our historical trends and assumptions. The province of insurance is often a misunderstood and lightly inspected area of security analysis.