What it means
Welfare benefits include medical, dental, disability, life and similar cover. A single large employer can set up its own plan and spread risk across its workforce.
A small firm has few employees, so its costs can swing widely and its choice of insurers is limited. A MEWA lets several unrelated employers band together, which spreads the risk over a larger group.
It may be run by an association, a trade body, a union-linked trust or a commercial administrator. Some are fully insured, meaning an insurance company carries the risk, while others are self-funded, meaning the arrangement itself pays claims from the contributions collected.
The distinction matters, because self-funded MEWAs carry more risk. If claims exceed contributions and reserves are too low, the arrangement may be unable to pay, leaving employees with unpaid medical bills and employers facing sudden extra charges.
A number of failures have led regulators to scrutinise these arrangements closely. Regulation is shared between federal and state authorities.
Federal law applies certain requirements, and states generally have wide powers to regulate MEWAs as insurance, including setting reserve and licensing rules. An employer considering joining should check whether the arrangement is licensed and which regulator oversees it.
From a finance perspective, an employer should ask who bears the claims risk, how the premiums are set, what reserves are held and whether additional contributions could be demanded if experience is poor. The accounting depends on the structure, but the employer normally records its contributions as an employee benefit expense.
Due diligence on the administrator, the stop-loss insurance and the audited financial statements of the arrangement is sensible before signing up. The category was created by federal law in the early 1980s after arrangements collected contributions from small employers and then failed to pay claims.
Plans maintained by a single employer, or under a collective bargaining agreement, generally fall outside the definition, and legal advice is usually needed to confirm which side of the line an arrangement falls on.
In practice
Real-world examples.
Example
A group of 40 small dental practices forms an association and sets up a health plan for its staff under one arrangement. A single insurer covers the claims at a negotiated group rate. The practices pay lower premiums than they would as separate small groups. The association's administrator handles enrolment, renewals and employee questions for all of them.
Example
A construction trade body offers its members a self-funded benefits programme. Each employer pays a monthly contribution, and the programme pays claims from the pool, backed by stop-loss insurance for large claims. The programme's finance team publishes annual results to members.
Example
A small manufacturer is offered a cheap health plan through an unfamiliar administrator. Before joining, its finance director asks for the licence, the audited accounts and details of the reserves. She finds that reserves are thin and decides not to join.
Case study
Seen in the real world.
Prairie Trades Association is an illustrative, fictional group that created a self-funded health plan for 120 small employer members covering 1,500 people. It collected $9,000,000 in annual contributions and expected claims of about $7,500,000, with administration and stop-loss costs of $1,200,000.
In its third year, claims came in at $9,600,000 because of several large hospital cases. Contributions of $9,000,000 and reserves of only $400,000 could not cover claims plus costs of $10,800,000, a shortfall of $1,400,000. The trustees had to ask members for a special contribution.
Some members were unable to pay, and the plan faced difficulties. The trustees later raised contributions by 12% for the following year, bought stop-loss cover that paid for any single claim above $150,000 and built reserves equal to three months of expected claims. The illustrative lesson is that a self-funded arrangement needs adequate reserves and stop-loss protection, and employers should check them before joining.
Watch out
Common mistakes.
- Assuming every MEWA is fully insured, when many are self-funded and carry the claims risk themselves.
- Choosing an arrangement on price alone, without checking its licence, reserves and financial statements.
- Assuming that paying the premium ends the employer's responsibility, when poor results can lead to extra contributions or loss of coverage.
Questions
People also ask.
Who regulates a MEWA?
Both federal and state authorities have a role, and state insurance regulators often have strong powers over licensing, reserves and solvency.
How is a MEWA different from a single-employer plan?
A single-employer plan covers the staff of one company, while a MEWA covers employees of several unrelated employers under one arrangement.
What should an employer check before joining?
The regulatory status, who bears the claims risk, the size of the reserves, any stop-loss insurance and the audited accounts of the arrangement. It is also worth asking what happens to claims already incurred if the arrangement closes, and whether employees would keep their cover.
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