Question: What is an insured plan versus a self-funded plan?

Answer: Employers that offer health and welfare benefits typically will pay for those benefits in one of two ways: either by purchasing health insurance from an insurance company (fully insured plans), or the employer provides the benefits directly to employees (self-funded plans). Most employers with self-insured plans work with a third party administrator (TPA) to write and administer the plan. Two of the main differences between the two types of plans are based on which entity assumes the risk, and certain plan characteristics:

  • Insured: The employer pays the entire premium and, in return, transfers all of the risk and responsibility for claims payments to the insurance company.
  • Self-Funded: An arrangement under which all or some of the risk associated with providing coverage is not covered by an insurance contract. Self-funded is usually the most appropriate term because true self-insurance means a complete reliance on internal assumption of liability. While many use the term self-insured, self-funding more accurately describes arrangements where some liability is covered directly by the plan sponsor and the plan sponsor purchases a stop-loss policy to limit upper liability.