Self-insurance is a hot topic, especially for many small-business owners seeking new ways to reduce expenses and save money. But is it a safe option?
Following is some information to help you separate fact from fiction on this timely topic:
It all sounds so simple. Rather than purchasing an expensive insurance policy, establish a savings plan so there is money available in the event of a claim. The money accumulates with interest while remaining under the control of the employer.
What Could Possibly Go Wrong?
In recent years there have been a number of insolvencies involving some of the largest self-insurance groups in the nation. During 2006, more than $600 million in deficits were found in New York alone, and that was long before the economic crisis hit the nation. Experts predict a continued rate of default and insolvency among self-insurance groups due to rising healthcare costs and insufficient contributions combined with lackluster returns.
A critical concern involves the additional tax burden placed on small-business owners. Current tax law does not allow deductions for self-insurance plans, whereas the cost of providing health insurance for employees is eligible for full tax deductions under normal plans. Another often-overlooked issue involves the cost of building up a sizable fund. Unless a company has significant reserves at its disposal, self-insurance groups are often forced to rely upon a stop-loss policy for catastrophic coverage.