We have a broker who is trying to introduce a "minimum premium payment" health plan. This is a fully insurance plan with self insured characteristics. Specifially, 80% of the premium goes to the health care vendor and 20% is held in a reserve (in our bank). At year end, when we "true up" the plan, based on our experience rating, we may be able to keep a certain portion of the reserve money to use for future medical plan expenses.

Has anyone had any experience with this type of plan? What are your thoughts? Any red flags we need to look for? This one is new to me.

I'm pretty familiar with minimum premium plans and would be glad to help.

In a traditional minimum premium plan the insurance company breaks the cost down to three components, the "minimum premium" or MP, the claims cap (usually capped monthly with annual accumulation, and the terminal liablity factor. The MP consists of the insurance company retention (admin), pooling charges, and any other fees. You will pay your MP monthly plus the prior month's claims up to the cap. Usually the first year claims are split 75% to 80% into the claims cap, 20% to 25% into the terminal liablity. If you cancel at the end of year one, your only liability should be the terminal liability fee. In essence, you are paying the retention/pooling, claims costs, and you are holding the reserve instead of the insurance company.

What you have described I would call a fully insured retrospectively rated plan with a "retro rate". They are going to bill you a portion of the premium during the year. At some point after the end of the policy year they will do a settlement. Up front you need to know how the settlement process will work, ie. the formula, reserve factors, etc. When will they do the settlement? 60 days with a substantial IBNR adjustment or will they wait 120 to 150 days to have fully incurred claims? What is their retention (admin) cost? Is is guaranteed/ How may it change from the initial projection to final settlement? Same for pooling? Plus, there is a charge for the "retro", a cost of money factor, since the client is holding the reserve.

I don't see anything wrong with the arrangement perse. The problems occur when the parties aren't on the same page, and don't understand, and later disagree on how the plan is supposed to work.

I agree wholeheartedly with Taylojeff, and what a great explanation.

I do have 2 cautions for Benefitsguru67. The first is that there are many different ways to structure the plan, and many nuances that need to be understood and addressed. After agreeing to the basics, I jokingly refer to the next step as the "1 million question step", because of all the different issues that you need to understand.

The second is the capability of the broker. I DO NOT MEAN TO DENEGRATE OR QUESTION YOUR BROKERS ABILITIES. Rather, you need to understand what you are getting into, and make sure the broker has a good understanding also.

Min Prem plans became popular in the late 70's, but somewhat faded as Managed Care took hold. As I got into the business in the early 80's, we had to learn these type of plans (Alternative Funding) because of their popularity. Now that Alternative Funding is making some gains again, brokers are again selling them. I have seen many instances where the broker was unaware of the details and sold a plan incorrectly, leaving the client and employees upset.

Good luck.
Lee

I also do not mean to denigrate your broker, but feel the need to reiterate the warnings.

It is not what the broker says or explains, that is important. What is important is what you contractually agree on with the insurance company and the interpretations of BOTH you and that insurer.

Make sure you BOTH interpret and understand the same things in the same way. Also get written explanations and illustrations of any formulas and calculations. Do not leave anthing to a future interpretation.

In my 20 years as a broker etc I have seen very very few agents/brokers who understood Minimum Premium/ Retro Funding etc. There were a few back in the late 1980's who still remembered what was learned in the 1970's. I doubt that many of those are still around, so it is quite likely that your broker is new and still learning. BUT the bigger danger is that since the strategy has not been in much use for the last 20 years, the insurance company people might themselves be new and still trying to learn and understand.

So it might be prudent to check the experience level of the insurer and company personnel also. Checking with users who have gone through a few reconciliations might also be good.

Are these plans considered self insured for purposes of section 105(h) of the Code?

Harry O,

"Are these plans considered self insured for purposes of section 105(h) of the Code?"

If the minimum premium plan is structured in a classical manner, then it is an insured plan.

For example, the insurer agrees to an advance monthly premium rate ("a), which is collected on a regular basis, and then has access to a retrospectively determined amount (not to exceed "b") so that the total of the year's "a" collected premium plus any retrospective premium equals the benefits incurred during the year and the insurer's retention (charge for for such items as administration, marketing, premium taxes, general overhead and proft).