Key Considerations When Exploring Captives for Voluntary Employee Benefits

Key Considerations When Exploring Captives for Voluntary Employee Benefits
September 3, 2024 6 mins

Key Considerations When Exploring Captives for Voluntary Employee Benefits

Key Considerations When Exploring Captives for Voluntary Employee Benefits

Employers in the U.S. should understand the unique risks associated with voluntary benefit captives when considering alternative insurance arrangements for their voluntary benefit plans.

Key Takeaways
  1. Voluntary benefit captives are fundamentally different from other healthcare and benefit captives because they are funded with employee dollars.
  2. To avoid the risk of employees dropping coverage, employers should pay greater attention to plan quality and design to ensure it meets the needs of their people.
  3. There are five strategies we recommend using when evaluating the alternative risk management landscape.

Captives for medical plans have become more popular as employers look to control healthcare costs, manage risk and increase flexibility of their benefit plans. These advantages have led some employers to also consider a captive arrangement for their voluntary benefit plans. However, since they are funded by employee dollars, voluntary benefit captives have unique aspects and inherent risks that require careful consideration.

Captives dedicated to voluntary benefits are a relatively newer concept. However, the market has seen numerous recent entries, generating more buzz. As interest grows, employers need to understand the potential risks and the best strategies for approaching alternative voluntary benefit arrangements. 

Types of Voluntary Benefit Funding Arrangements

Three primary types of alternative funding are emerging in the voluntary benefits space. Two of them can be classified as captives and the third, although not a captive, works similarly.

  • Single-employer captive:

    A single-employer captive is an insurance arrangement designed to serve a singular corporation. Voluntary benefits are typically excluded from this framework, due to the Department of Labor's exemption criterion related to conflicts of interest. However, large employers may consider applying for an exemption.

  • Multi-employer captive:

    This captive operates on the principle of pooled resources among employers, ensuring no conflicts of interest arise. Employees are provided with a comprehensive insured program by a leading insurance provider, while the multi-employer captive undertakes reinsurance of the risk alongside the pool of employers.

  • Large market participating contract:

    These are similar to captives but offered by carriers and do not require a separate legal entity. They allow employers to share the underwriting results of their voluntary benefits, but they could have minimum participation and premium requirements — and they may not offer the same level of transparency and flexibility as captives.

All three choices require a formal written statement designed to assist employers in complying with the Employee Retirement Income Security Act (ERISA) standards for their various benefit plans (referred to as an ERISA wrap plan document).1

Given the difference in employer-funded benefits versus voluntary employee-funded benefits, there is an increased focus on the fiduciary responsibility of organizations and their carrier and broker partners to ensure voluntary benefits are in the best interest of the employee.

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When employees are paying for the entire cost of a benefit, employers have an added responsibility. They should ensure benefits are high-quality, cost-effective and suitable for employees’ needs, and that claims are being paid appropriately.

Dani McCauley
Growth Leader, Health Solutions, North America

Risk Considerations for Voluntary Benefit Captives

There are a few primary risks that can occur with voluntary benefit captives and similar structures. 

  • Employees perceive a lack of fairness and transparency in the plans. Employees might believe that the arrangement favors returning premiums to the plan and undercompensates policyholders for their claims. It is important for employers to provide clear and transparent disclosure regarding the details of the captive arrangement.
  • Plans don’t meet the needs of employees. These alternate arrangements could pose a risk if the intent of the captive is focused on premium return versus claims value. This underlies the need to evaluate your own population’s health trends and align your coverage strategy to the needs of your population. For example, supplemental plans should provide equal coverage amounts for spouses and dependents. Additionally, critical illness protection has been enhanced by many carriers to include plan designs for mental and behavioral health.
  • Employees drop their coverage. This can happen when there is a mismatch between the coverage in the supplemental plan and the actual claims being filed. Dropped coverage can result in employees being less engaged with their overall benefits. It can also expose them to risk that can negatively impact their overall wellbeing and performance.

Five Tips When Considering Alternative Voluntary Benefit Arrangements

If an organization wants to consider alternative options for their voluntary benefits, it’s important to:  

  1. Understand the alternate funding landscape. There are distinct differences to be aware of. Consider all options in light of the unique circumstances of an organization and its workforce. 
  2. Include disclosure language in the enrollment system flow. This helps build trust and mitigate risks, allowing employees to understand the mechanics of alternative funding and its impact on benefits and premiums. Any possible conflicts of interest or incentives that could sway decisions must be transparently communicated.
  3. Create market-leading plan designs to achieve benefit goals. If an employer is considering a single or multi-employer captive, they should carefully select plan designs and closely monitor the providers and plans offered. Conduct due diligence to ensure that benefits are comprehensive and suitable for employee needs.
  4. Turn on auto claims adjudication. Ensure maximum claims value in an arrangement that may be more focused on return of premium. Carriers have varied client delivery models to deliver claims notification and even claims payment automation. Turning this functionality on will ensure claims payment is a priority in the voluntary plan strategy.
  5. Explore a voluntary benefit commission offset model. This traditional method is an excellent way to reinvest commission dollars with permissible use of commissions without affecting the employee funded premiums or claims. It involves the broker or consultant investing a percentage of its revenue back to the employer's plan (with an ERISA wrap plan) to be used for permissible services and solutions that benefit the whole population. This way, employers can avoid the potential pitfalls of captives and still achieve their objectives.

“It’s important to use caution and study the choices when considering alternative arrangements for supplemental programs,” says Dani McCauley, a growth leader in Aon’s North America health team. “There is always risk that is unique to these kinds of arrangements. But with the right strategies, you can ensure the right amount of due diligence before making any decision.” 

Find out more about maximizing the value of your voluntary benefit strategy here: Voluntary Employee Benefits.

 

1 Employee Retirement Income Security Act (ERISA)

Aon’s Thought Leader
  • Dani McCauley
    Growth Leader, Health Solutions, North America

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This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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