For a startup to last beyond a few years, all the stars have to align. The business has to have a great product and a way to reach its customers. There has to be a place for that product in the market. Investors have to be willing to fund the business until it starts earning profits, which may take years.
A successful startup also needs a team of skilled employees who are engaged in the work and committed to building something that lasts. Providing high-quality health insurance is one way a growing startup can attain and retain top talent. Self funding and stop loss coverage are two tools that can make that goal achievable.
Startups Have Unique Health Insurance Challenges
There’s a reason that it’s fairly rare to hear about mid-career professionals going to work for startups. It’s risky to join a company that may or may not exist in a year. Plus, new businesses often just can’t offer the same benefits that established corporations do.
This creates a catch-22 for startup owners. You need to attract the best and most experienced talent if you’re going to make this business work, but the best workers can choose to be selective. This is a big part of the reason that startups generally employ young workers just starting out, who may be more willing to sacrifice health benefits than older employees with families are.
Unfortunately, a small operation with a dozen employees doesn’t have the necessary bargaining power to negotiate competitive rates from a major health insurer. Startups also have to answer to their investors, who want to see their money used to grow the business and its profits. Not all investors will consider providing high-quality employee benefits as a good use of limited funds.
Another major challenge for startups is that there may be no one involved who has any experience with employee benefits. The founder of a startup that sells hot sauce has probably spent years obsessing over the perfect recipe, not preparing for the responsibilities of being a small business owner. The learning curve is very steep for entrepreneurs, and many just don’t know the most cost-effective way to approach employee benefits.
Self Funding for Startups
Self funding is an insurance arrangement in which an employer pays for its own benefits. Just a decade or so ago, few startups took advantage of self funding. Large companies with hundreds of employees used this strategy to provide health insurance, but it wasn’t considered viable for smaller employers. Self funding has become increasingly more attractive to small employers in recent years, in part because these arrangements are exempt from certain Affordable Care Act requirements. Now, even small businesses take advantage of self funding.
With a traditional insurance arrangement, the employer pays a set monthly premium to their insurance carrier. The carrier pays for claims that employees incur. Because premiums are fixed in advance, the employer may end up paying the insurer more than the insurer pays out in claims.
Self funding cuts out the middleman. Instead of paying premiums to an insurance carrier, the employer puts money in a special trust and uses this fund to pay its employees’ claims directly. The employer tailors its own plan to meet its employees’ needs rather than being locked into a plan designed by an insurance carrier. A third party administrator helps with establishing the plan, processing claims and other administrative work.
Self funding can be a good fit for startups because they tend to hire young workers, who have lower medical costs on average than older workers. If the employees covered by a self-funded plan stay mostly healthy and incur only minor claims, the employer may end up with a surplus in its fund at the end of the year.
On the other hand, the possibility that an employee will get seriously hurt or sick puts tremendous financial pressure on the self-insured employer. Without an insurance carrier to fall back on, the onus to pay for claims is on the employer. A single high-value claim could be enough to wipe out a big chunk of the health fund that’s supposed to provide for everyone.
This is where stop loss coverage comes in. It’s a kind of insurance policy that self-insured employers use for protection against catastrophic claims. When you buy your stop loss policy, you can set the maximum amount that you’ll pay out of pocket for any one employee’s claims, and the maximum amount you’ll pay for all claims in a given year. The stop loss carrier covers any expenses that exceed those maximums. Having this kind of coverage allows self-insured employers to more accurately budget for health care expenses.
I know that self funding and stop loss may seem daunting if you’re a new employer with limited experience around providing employee benefits. Every situation is unique and these strategies might not be right for you and your startup. But if self funding and stop loss do make sense for you, they may prove incredibly useful tools for controlling health care costs and keeping employee morale high for years to come.
What questions do you have about self funding and stop loss for startups? I’m always available to help. Contact me today!