Maryland Life and Health Insurance License Practice Exam

What is a self-funded plan?

1. A plan where the employer pays insurance benefits from current revenues

2. A plan that is entirely funded by the employees

3. A plan that requires third-party insurance administration

4. A plan with no employer involvement in funding

The correct answer is: A plan where the employer pays insurance benefits from current revenues

A self-funded plan is characterized by the employer assuming the financial risk for providing health care benefits directly to employees instead of purchasing a traditional fully insured plan from an insurance carrier. In this arrangement, the employer pays for employees' medical claims out of its own resources or reserves, often using current revenues to fund these expenses. Employers who choose this model typically do so to have more control over their health plan expenses, as they can tailor benefits to meet their employees' needs and potentially save on premiums that would otherwise go to a health insurance company. Self-funding also allows employers to avoid certain state insurance regulations and may provide tax advantages. The other options present different funding mechanisms that do not accurately define a self-funded plan. For instance, a plan funded entirely by employees or one that has no employer involvement contradicts the essence of a self-funded approach. In addition, requiring third-party administration is common in both self-funded and fully insured plans; however, it is not a defining characteristic of a self-funded plan since some employers may opt to administer the plan themselves.