Disturbing Trend with Level-Funding Benefits

From 2023, when we first reported Level-Funding benefits, to now, the number of questions that we have received has significantly increased. In addition, the questions coming to us are now from small groups who, in the past, never had to file Form 5500s (unless they had a trust or were a MEWA). They are now being instructed that they may need to do so. Overall, we see that many do not fully understand the ERISA compliance requirements for level-funding with Form 5500.

Level funding and requiring a trust

Level-funding is a type of self-insured benefit. It requires a set amount of funds set aside for each month to handle the estimated claims, administrative costs, stop loss, etc. The funds are saved in an account, and if there is an excess amount left over at the end of the year, the Plan Sponsor will receive a refund. The reserve of holding the funds creates the issue. Typically, the funds are segregated outside of the Plan Sponsor’s general assets. Oftentimes, the TPA holds the funds (thus the group is no longer protected by Technical Release 92-01). If the funds are in one of the following arrangements, there is a strong likelihood of the existence of a trust. A trust arrangement requires a Form 5500 report to be filed regardless of the size of the group.

1. Funds are in a TPA account – they are not in an account under the Plan Sponsor’s general assets
2. Funds are held by a TPA that is not a health insurance carrier like Aetna, Cigna, etc.
3. Funds are in a separate account of the Plan Sponsor, however, the TPA does not have check-writing ability to use the funds

The DOL’s Form 5500 Instructions does point out that funds handled in this way may require the trust.

See the “Who is to File” section of our Form 5500 instructions:

Plans that are NOT unfunded include those plans that received employee (or former employee) contributions during the plan year and/or used a trust or separately maintained fund (including a Code section 501(c)(9) trust) to hold plan assets or act as a conduit for the transfer of plan assets during the year.

We have heard from Plan Sponsors where the TPA has informed the group that they need to file a Form 5500 and need a trust. The groups have discovered that, in fact, they should have filed for several years. Now they have late filings.

Saving grace:

If the TPA is an insurance carrier, there is an ERISA provision that allows the funds to be held without the need of a trust:

ERISA §403 [29 USC §1103] establishment of trust.

•  Exceptions to needing a trust: to any assets of such an insurance company or any assets of a plan that are held by such an insurance company.

What to Do:

1. Review the service agreement with the TPA and ask:
2. Is the account holding the funds in the Plan Sponsor’s or TPA’s name?
3. How is the refund handled?
4. Next, we encourage you to seek the advice of an ERISA attorney to review and advise

Overall, when level-funding is promoted, the ERISA compliance requirements may not be fully relayed. The Plan Sponsor must fully review, determine, and meet these compliance mandates.

As mentioned, we are receiving several questions regularly on this funding arrangement. Please feel free to reach out to Ann McAdam at amcadam@wrangle5500.com for further assistance.