Self-insurance

Self-insurance describes a situation in which a person does not take out any third party insurance. The essence of the concept is that a business that is liable for some risk, such as health costs, chooses to "carry the risk" itself and not take out insurance through an insurance company.

In the United States the concept applies especially to health insurance and may involve, for example, an employer providing certain benefits – generally health benefits or disability benefits – to employees and funding claims from a specified pool of assets rather than through an insurance company, as the term is traditionally used. In self-funded health care, the employer ultimately retains the full risk of paying claims, in contrast to traditional insurance, where all risk is transferred to the insurer.

In the United States, a self-funded health plan is generally established by an employer as its own legal entity, similar to a trust. The health plan has its own assets, which, under the Employee Retirement Income Security Act of 1974 (“ERISA”), must be segregated from the employer’s general assets. The health plan’s assets are derived from pre-tax (in most cases) contributions made by employees, and sometimes additional contributions made by the employer.

The contributions to the health plan’s assets are required to be immediately segregated from the employer’s general assets. Any claims incurred by plan members in excess of the amount contained within the health plan’s pool of assets are the sole responsibility of the employer. The employer, in that case, must deposit its own funds into the health plan’s trust account sufficiently to fund any outstanding claims liabilities.

Health plans that cover dependents as well as employees collect contributions for dependents from the employee’s payroll deductions. Similar to in traditional insurance, the plan sponsor determines the cost of health coverage and generally requires different payroll deductions depending on whether an employee elects self-only coverage, self plus spouse, self plus spouse plus child(ren), or certain other permutations as determined by the plan sponsor.

Self-funded health care allows some flexibility in structuring a benefit plan; some plans allow fewer options, for example only a choice between self-only coverage and full family coverage, with two contribution tiers.

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Wikipedia