Self-Funded or Insured: Which Continuation Law Applies to Your Plan
State continuation laws reach insured plans. Self-funded plans answer to federal COBRA alone.
Employers are often surprised to learn that how a plan is funded decides which continuation law applies. This guide explains the federal preemption rule in plain terms and what it means when a group changes funding.
Why Funding Changes the Answer
ERISA sets a general rule and carves out insurance.
The general rule. ERISA supersedes state laws that relate to an employee benefit plan, under 29 U.S.C. 1144(a).
The saving clause. State laws that regulate insurance are not superseded under 1144(b)(2)(A). In Metropolitan Life v. Massachusetts (1985) the Supreme Court held that a state mandated-benefit law regulates insurance and applies to insurance contracts bought by ERISA plans.
The deemer clause. Under 1144(b)(2)(B) an ERISA plan is not deemed to be an insurer for purposes of state insurance law. In FMC Corp. v. Holliday (1990) the Court held this exempts self-funded plans from state laws that regulate insurance.
The Practical Result for Continuation
The same state law can apply to one employer and not another.
Insured plans. State continuation laws, often called mini-COBRA, apply to health plans that provide benefits under insurance contracts, according to the Department of Labor, and some cover employers with fewer than 20 employees.
Self-funded plans. A self-funded plan is governed by federal COBRA and is generally not subject to a state continuation law.
The size line. Federal COBRA exempts a plan when all employers maintaining it normally employed fewer than 20 employees on a typical business day in the preceding year, under 26 U.S.C. 4980B(d).
What To Check When a Group Changes Funding
A funding change is also a change in which law governs continuation.
Ask how the plan is classified. Whether benefits are provided under an insurance contract is the question that matters. A level-funded or captive arrangement should be checked with the carrier or counsel rather than assumed.
Update the documents. The plan document, summary plan description and notices should say which continuation rules the plan follows.
Tell employees on leave. People already on continuation when funding changes need a clear explanation of what happens to their coverage.
A Small Employer That Moves to Self-Funding
The move can remove a state right.
The facts. A 15-employee company has an insured plan in a state with a continuation law that covers small employers. At renewal it moves to a self-funded plan.
The result. Federal COBRA does not apply to the company because it has fewer than 20 employees, and the state law reaches insured plans only. Continuation would then depend on the plan’s own terms.
The takeaway. Before changing funding, confirm in writing which continuation rights employees will lose or keep.
Related Rules and Sources
The statute and cases behind the rule.
State Continuation and Mini-COBRA
How state laws differ.
COBRA Continuation Coverage Law
The federal rules.
COBRA in Colorado
A state continuation example.
29 U.S.C. 1144, preemption · Metropolitan Life v. Massachusetts, 471 U.S. 724 · FMC Corp. v. Holliday, 498 U.S. 52
We check funding before you change it.
We compare insured and self-funded options, including what each does to employees’ continuation rights.
Related pages.
State Continuation and Mini-COBRA
State laws for smaller employers.
COBRA Continuation Coverage Law
The rules in full.
COBRA Notice Deadlines
The 30 and 14 day clocks.
COBRA in Colorado
Colorado state continuation.
COBRA in Texas
Texas state continuation.
Michigan Conversion Coverage
What Michigan law provides.
Questions that come up.
Short answers to the questions we hear most. Each links to the full page.
Does state continuation law apply to a self-funded plan?
Generally no. Self-funded plans follow federal COBRA, and state insurance laws reach insured plans.
Why does funding decide which law applies?
ERISA saves state insurance laws for insured plans but not for self-funded ones.
What happens to continuation rights if we change funding?
They can change. Confirm in writing which rights employees keep before you switch.
Ready? Send us your renewal, or talk it through with someone first. No cost, no obligation.
General information, not legal or tax advice. Plan-specific questions belong with the plan documents, the carrier and counsel.
Send us your renewal.
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The renewal letter
Your current plan summary
Contribution split by tier
Enrolled counts by tier
Four documents, two more if your group is 50 or more. Nothing else; every extra one is a reason to postpone.
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