Self-Funded Insurance May Cost More Than It Saves: Risk ACA Non-Compliance Penalties Can Add Up

By Sherri Bennett, SPHR & SHRM-CP on Jan 23, 2019
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Health insurance costs have consistently and noticeably increased every year since the Affordable Care Act (ACA) became law in 2010. To save money, some smaller companies have turned to self-funded insurance plans – a model more typically employed by larger firms.

Companies that take the self-funded approach essentially operate their own health care plans, trading insurance risk for much lower premiums. They collect premiums from participating employees and use those monies to cover medical claims. In so doing, self-insurers avoid the ever-escalating prices insurance companies charge for health care coverage.

The Drawbacks of Self-Insurance

But self-funded plans have disadvantages that many smaller companies aren’t aware of. While self-insurance may cut costs initially, it can turn out to be financially and administratively devastating for small and medium-sized businesses in the longer run. Bigger companies that self-insure can spread their risk over a larger pool of employees. They also have deeper pockets to absorb any catastrophic health incidents. Smaller companies don’t have those luxuries. When they choose self-insurance, they assume the risks insurance companies normally shoulder, and one or two catastrophic employee health events may result in dire financial consequences.

Another area of concern for smaller companies that opt for self-funded plans is ACA information reporting requirements, with which most small business owners are unfamiliar. The ACA mandates that companies with self-funded insurance plans file annual returns with the IRS to report information about the group health coverage they offered the previous year and about each covered individual.

ACA Reporting Requirements for Self-Insurers

Specifically, companies with fewer than 50 employees must:

Submit forms 1094-B and 1095-B to the IRS by February 28, 2019; and
Provide form 1095-B to employees by March 31, 2019 (or April 1, since March 31 is a Sunday).

Companies with 50 or more employees have to:

Complete forms 1094-C and 1095-C with parts I, II and III completed and submit them to the IRS by February 28, 2019; and
Provide form 1095-C to employees by March 31, 2019 (or April 1, since March 31 is a Sunday).

The penalty for failure to file a correct information return is $270 for each return for which the failure occurs, with the total penalty cap of $3,275,500 per calendar year. The same penalty applies for every incorrect payee statement employers provide to employees – meaning the maximum annual penalty for failure to comply with ACA information reporting requirements is $6,551,000.

And accuracy counts. Even a missing birthdate or incorrect Social Security Number can be enough to draw a fine.

Don’t Go It Alone

That’s a lot to remember and manage for small business owners who already are spread thin. The answer may be outsourcing.

Companies that partner with professional employer organizations (PEOs) eliminate the possibility of ACA penalties by offloading reporting responsibilities. PEOs can handle the complexities and time demands of complying with ACA regulations on behalf of their clients, and they offer a host of other services, too. For example, PEOs can reduce health care costs, as well as manage benefits, payroll and other critical human resource functions.

When it comes to growth activities, improving products or expanding services, business owners should look inward. But for complicated, confusing, HR compliance, where penalties for reporting failures can quickly add up, smart companies leverage the expertise of outside professionals.