Self-Funding Workers’ Compensation: 3 Reasons to Consider it for Your Business

Workplace accidents are no anomaly. The International Labour Organization estimates that 395 million workers sustained non-fatal injuries in the workplace. As workplace injuries are rising, businesses are required to have workers’ compensation in place. 

Though the cost of workers’ compensation insurance varies by state, it averages $45/month, says Investopedia. This might not seem too much if you belong to high-risk industries like construction. But if you’re from a low-risk industry like retail, workers’ compensation costs could easily eat into your bottom line. 

How do you cover your employees while saving some serious cash? There’s a way: self-funding workers’ compensation. 

Here, we’ll walk you through what it is and why you should consider it for your business. 

What is Self-Funding Workers’ Compensation?

A self-funding workers’ compensation plan, as the name suggests, is one in which the employer bears the financial risk of paying workers’ compensation benefits to its employees. That is to say, a company takes the financial responsibility for workplace injuries or illnesses directly into its own hands and doesn’t pay premiums to an insurance carrier. 

A self-funding workers’ compensation plan might sound risky, but it can also lead to big savings if you have the right structure in place. 

Take Hillsborough County, Florida, for example. Public schools in the county are planning to transition to a self-funded insurance plan by 2026. WUSF reports that their current insurer’s rising health insurance premiums are making them consider this. 

Schools estimate that this shift will reduce costs by about $20 million compared to the fully insured plan. 

To become self-insured, you must receive approval from the state where you intend to be a self-insurer. Individual states’ requirements and qualifications vary. 

Some of the key elements that, according to Prescient National, go into the state application process include historical payroll, planned per-loss retention level, financial statements, and loss information. 

To learn more about the process and determine if it’s a good fit, it would be best to consult with a risk management expert or insurance advisor.

Why Should You Consider Self-Funding Workers’ Compensation? 3 Benefits

Here are a few reasons why you should consider self-funding workers’ compensation:

1. Potential for Cost Savings

With traditional insurance, you have to pay regular premiums. Those premiums don’t just cover potential claims, but they also include the insurer’s admin fees, profit margins, and sometimes even costs associated with other companies’ claims. 

With self-funding, however, you’re cutting out the middleman. Instead of handing over a chunk of your budget to an insurance company every month, you’re only spending money when there’s an actual claim. 

For businesses with low injury rates or excellent safety records, this can mean substantial savings over time.

Consider this: In California, workers’ compensation insurance costs an average of 40 cents per $100 of payroll for low-risk employees. For higher-risk positions, it jumps to $33.57 per $100. 

Businesses in low-risk industries could retain a significant portion of those funds if they self-fund. The money they save can be reinvested into safety programs or other areas of the business.

2. Better Control Over Claims

When you buy a traditional workers’ comp policy, the insurance company decides how much to pay for claims and which doctors your employees can see. That isn’t the case with self-funding, however. 

Self-funding gives you more control over these decisions. You can choose medical providers, negotiate costs, and even settle claims faster.

Moreover, claims don’t go through a lengthy process involving adjusters, approvals, and layers of bureaucracy. In self-funding, you get to manage claims directly or work with a third-party administrator (TPA) you trust. This means faster decisions, quicker payouts, and, most importantly, better care for your employees.

3. Improved Cash Flow

Traditional workers’ comp insurance requires you to pay premiums on a set schedule—month after month, whether you’ve had one claim, 20 claims, or zero claims. The payment is predictable, sure, but it’s inflexible.

Meanwhile, things shift when you self-fund. Instead of locking up money in premiums, you keep it available in your business until a claim actually happens. That gives you way more flexibility to manage your finances day-to-day. 

For businesses with strong safety records and low injury rates, this can be a huge advantage. Instead of overpaying for coverage you may never fully use, you’re freeing up funds to reinvest in growth, equipment, or employee benefits. 

So, is it Worth It?

Self-funding workers’ compensation will be a smart move for businesses with stable finances, a strong safety record, and the resources to manage claims. 

If you love the idea of control and think you can handle the risks, it could save you money in the long run. But if the thought of a surprise six-figure claim is unsettling, sticking with traditional insurance might be the way to go.

Before you dive in, take a good look at your financial situation, safety protocols, and long-term goals. And don’t be afraid to consult with an expert or two; they can help you weigh the pros and cons of your unique circumstances.

At the end of the day, the goal is to protect your employees and your bottom line.