Which statement correctly distinguishes a fully insured group health plan from a self-insured (self-funded) plan?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
In a fully insured group plan, the employer pays premiums to a licensed insurer, and the insurer assumes the risk of paying claims. In a self-insured (self-funded) plan, the employer assumes the claims risk directly and commonly buys stop-loss insurance to cap catastrophic exposure, often hiring a third-party administrator to run the plan. Because the employer bears the risk, self-funded plans are generally governed by ERISA rather than by state insurance regulation. This risk-bearing difference is the central distinction between the two funding arrangements.
Why the other options are wrong
- B) ERISA preempts state insurance regulation of most self-funded plans, so they are generally not regulated by the state insurance department nor subject to state premium taxes in the same way as insured plans.
- C) Paying claims from the employer's own funds describes self-insurance, which is the opposite of a fully insured arrangement.
- D) Self-insured employers very commonly use third-party administrators to process claims and administer the plan.
Memory hook
Fully insured = the insurer writes the checks. Self-funded = the employer writes the checks, with a stop-loss umbrella.