[Special note: This blog is written with the premise that the plan in question is already under ERISA; if you ever need guidance on determining if you have an ERISA Plan, click here as a good place to start. This information comes from EBIA.]
Do you know how to report level funding in the Form 5500? If you are uncertain, you are not alone. Wrangle has received many inquiries on this type of funding for benefits. Common questions asked are:
- How is this funding noted in the Form 5500?
- Is it to be treated in the same manner as self-insured benefits?
- Does it always require a trust to be in place?
Unfortunately, there is not a one size fits all answer. The benefit needs careful consideration. We highlight these aspects for you below.
Level funding typically does not incorporate a determined premium paid to a carrier each month in the same manner as a fully insured benefit. Instead, the plan sponsor likely pays a set fee from its general assets to cover the likely claims, stop loss, and administrative fees. This is very similar to being self-insured. In fact, some refer to level funding as a type of self-insured product.
- As a result, for the Form 5500s, this payment arrangement would have general assets checked, and no Schedule As would be attached.
However, this is not the final answer.
The Plan Sponsor needs to take a deeper dive with its legal team on how funds are being handled. Typically, in a level-funding arrangement (which would include employee contributions through the Section 125 Plan) funds are held in place by a carrier or TPA in an omnibus account. For some months, claims may be lower than planned, and the funds are held to the side until claims are above the threshold. If claim dollars remained low for the year, there is a chance that the plan sponsor could receive a refund. (Typically, self-insured claims are paid as they occur, so, in theory, funds are not to be held for long periods of time.)
If the carrier or TPA holds onto these contributions for longer than 90 days, then there may be the need to have a trust. The DOL provided an exception to holding a trust with Technical Release 92-01. However, for this to apply, the contributions cannot be held for longer than 90 days. (If you need more information on trusts, click here to read our blog piece on this subject.)
Also, the group’s legal needs to consider are if the omnibus account is an extension of the employer’s general assets and not noted as the “Plan’s” assets. Funds held outside the general assets arena may need the trust.
Please note, this level funding arrangement is not tied to just large groups. Level funding is heavily promoted to small groups. If their funding is not handled properly, they would need a trust and therefore would need to file the Form 5500. (All trusts must file a 5500 regardless of the number of participants enrolled in the plan.)
Wrangle did reach out to the Department of Labor, including one of its divisions – the Office of Regulations and Interpretations for additional insight and clarity. Unfortunately, no specific comments were provided. The DOL requested that the Plan Sponsors seek the advice of an ERISA attorney.
Overall, Wrangle will report level funding in the manner that we report self-insured. We will rely on the plan sponsor for their determination and direction on whether a trust is in place.
If you have any questions or need further details, contact Ann McAdam: firstname.lastname@example.org.