South Carolina Life and Health Practice Exam

Regarding ERISA, what does it mean when a plan is "self-funded"?

1. The employer funds the plan without insurance coverage

2. The employees contribute entirely to the plan

3. The plan is reviewed by an insurance agent

4. The plan must provide full insurance benefits

The correct answer is: The employer funds the plan without insurance coverage

A self-funded plan, in the context of the Employee Retirement Income Security Act (ERISA), means that the employer takes on the financial risk of providing benefits directly to employees, rather than purchasing insurance coverage from an insurance company. In a self-funded arrangement, the employer pays for the healthcare claims directly, using funds that they have set aside to cover these expenses. This allows employers greater flexibility in designing benefits and managing costs, as they are not bound by the terms established by an insurance provider. Self-funded plans often align with companies' financial strategies, allowing them to avoid paying premiums to an insurer and instead managing claims internally. Employers may choose to employ third-party administrators to handle claims processing and other administrative tasks, but the risk and funding remain with the employer. In contrast, other options highlight different functions or attributes related to employee benefit plans that do not align with the concept of a self-funded plan. For instance, employee contributions to a plan do not define whether it is self-funded or not, and a plan reviewed by an insurance agent does not imply self-funding. Additionally, the requirement for full insurance benefits pertains primarily to fully insured plans, which are directly provided through insurance contracts.