Self-Funded vs. Level-Funded Health Plans

Three funding structures, defined

Funding describes who pays claims and who carries the risk when claims run high. The benefits your employees see can be identical across all three; what changes is the financial machinery behind them.

Fully insured

You pay a fixed premium per enrolled employee. The carrier pays all claims and keeps whatever is left over. Premiums for small groups are set under ACA rating rules rather than by your group's own claims history, which means a healthy group and an unhealthy group of the same size and geography pay similar rates. Your cost is completely predictable and your upside is zero: a year with almost no claims produces no refund.

Self-funded

You pay claims out of company funds as they are incurred. You hire a third-party administrator or use a carrier's administrative-services-only arrangement to process claims and rent a provider network. You buy stop-loss insurance to cap catastrophic exposure. You keep whatever you do not spend.

Self-funded plans are governed by ERISA, which generally preempts state benefit mandates and state premium taxes. Federal requirements including ACA market reforms still apply — the 2026 out-of-pocket maximum of $10,150 for self-only and $20,300 for family coverage applies to non-grandfathered self-funded plans as it does to insured ones. You also take on plan sponsor obligations, including Form 5500 filing above certain thresholds and the PCORI fee, which the employer remits directly rather than the carrier.

Level-funded

A self-funded plan packaged to feel like a fully insured one. You pay a single fixed amount each month, which the carrier splits three ways:

• a claims funding component that goes into an account to pay your group's claims,
• an administrative fee covering claims processing, network access and reporting, and
• a stop-loss premium protecting against claims above the expected level.

If claims come in below the funded amount, some or all of the surplus may be returned at the end of the plan year. If claims exceed it, aggregate stop-loss absorbs the excess and your monthly payment does not change mid-year. Legally this is self-funding — ERISA applies, state mandates are generally preempted, and the group is typically medically underwritten.

Stop-loss: the piece that makes it work

Stop-loss insurance protects the employer, not the employee. Employees never interact with it. It exists so that one catastrophic claim cannot exceed what the business can absorb.

Specific (individual) stop-loss

Caps your liability for any single covered person over the plan year. The threshold is the attachment point — commonly somewhere in the range of $25,000 to $50,000 for smaller groups, higher for larger ones. Above it, the stop-loss carrier reimburses. A $600,000 transplant against a $50,000 specific attachment point costs the plan $50,000.

Aggregate stop-loss

Caps total claims for the whole group, typically at around 125% of expected claims. This is what protects against many moderate claims rather than one enormous one, and it is what allows a level-funded arrangement to promise a fixed monthly cost.

Contract basis — the detail that quietly decides cost

Stop-loss contracts specify which claims they cover using paired numbers describing the incurred window and the paid window:

• 12/12 — incurred and paid within the same twelve months. Cheapest, and the most exposed, because a claim incurred in month eleven and paid in month fourteen is not covered.
• 12/15 or 12/18 — incurred in twelve months, paid within fifteen or eighteen. Covers the lag between treatment and payment.
• 24/12 — a wider incurred window, useful for a plan in its first year taking over claims incurred under a prior arrangement.
• Paid contract — covers whatever is paid during the year regardless of when incurred. Broadest and generally most expensive.

Comparing two stop-loss quotes without comparing contract basis is not a comparison at all. A cheaper 12/12 contract can leave a real gap that only becomes visible when the plan terminates.

Lasering

If the carrier identifies a covered person with a known ongoing high-cost condition, it may assign that individual a higher attachment point than everyone else — a laser. A group with a $50,000 general attachment point might have one member lasered at $250,000, meaning the plan absorbs the first $250,000 for that person. Lasers reduce the stop-loss premium and increase your exposure. Some contracts include no-new-laser provisions at renewal; those are worth paying for and worth asking about explicitly.

Cash flow and reserves

Fully insured cash flow is flat and known twelve months ahead. Level-funded cash flow is also flat during the year, with a possible surplus return afterward — you are effectively pre-funding claims and settling up at the end.

True self-funding is different in kind. Claims arrive when they arrive. A quiet February can be followed by a March with two hospitalisations. Fixed costs — administration and stop-loss premium — are steady, but the claims component is not, and aggregate stop-loss typically reimburses after the aggregate attachment is reached rather than smoothing month to month. A self-funded employer needs working capital sufficient to fund a genuinely bad stretch and wait for reimbursement.

This is the practical reason many employers who are large enough to self-fund choose level funding anyway: the arithmetic works, but the volatility does not suit how they run the business.

Where the risk actually sits

• Fully insured. Carrier holds all claims risk. You hold renewal risk — your rates can rise sharply and you have no claims data to argue with.
• Level-funded. You hold claims risk only up to the funded amount; aggregate stop-loss holds the rest. Your real exposure is at renewal, where a bad claims year can produce a substantial increase or a decision by the carrier not to renew, sending you back to the fully insured market.
• Self-funded. You hold claims risk up to your stop-loss attachment points, plus run-out liability on termination, plus fiduciary responsibility as plan sponsor. Highest volatility, highest control, and the only structure where sustained good claims experience compounds fully in your favour.

Side-by-side comparison

A worked example

An illustrative 40-employee company. These figures are simplified for teaching and are not quotes; real pricing varies by geography, industry, demographics and carrier.

Option A — fully insured

Premium of $620 per employee per month.

• Annual cost: $297,600, fixed.
• Best case: $297,600. Worst case: $297,600. No refund in a low-claims year.

Option B — level-funded

Fixed billing of $24,000 per month, composed of roughly $4,000 administration, $6,500 stop-loss premium, and $13,500 claims funding.

• Maximum annual cost: $288,000, fixed regardless of claims.
• If actual claims run at 65% of the funded amount, surplus is about $56,700. At a 50% refund share, roughly $28,350 returns to the employer, putting net cost near $259,650.
• If claims run hot, aggregate stop-loss absorbs the excess and the monthly payment still does not change. The consequence appears at renewal instead.

Option C — self-funded

Fixed costs of $10,500 per month for administration and stop-loss ($126,000 annually), with expected claims of $150,000 and aggregate stop-loss attaching at 125% of expected.

• Expected annual cost: about $276,000.
• Worst case within the aggregate: $126,000 fixed plus $187,500 claims = $313,500, and cash must be available as claims arrive.
• Best case in a very low claims year: closer to $200,000, with the entire saving retained.

The pattern this illustrates is the general one. Level funding narrows the range of outcomes; self-funding widens it in both directions. Fully insured coverage eliminates the range entirely and charges you for the privilege.

Which size company fits which structure

Under about 10 enrolled employees. Fully insured is usually the practical answer. Claims are too volatile to spread and few carriers will underwrite a level-funded arrangement this small on good terms.

Roughly 10 to 50. The core level-funded market. A healthy group here often sees real savings relative to community-rated small group coverage, with downside capped.

Roughly 50 to 150. Level funding remains attractive, and traditional self-funding becomes worth modelling — particularly with stable claims history and adequate reserves. Note that at 50 or more full-time and full-time-equivalent employees you are an applicable large employer under the ACA, with the associated offer and reporting obligations described in our guide to benefits administration.

150 and above. Self-funding is conventional. Claims are statistically predictable enough that carrier risk margin is usually money left on the table.

Group size is a starting filter, not a decision. A 40-person company with substantial reserves and a stable, healthy population may be a better self-funding candidate than a 200-person company with thin working capital and volatile claims.

Common and expensive mistakes

• Comparing on fixed cost alone. The lowest administration plus stop-loss quote is not the cheapest plan. Expected claims and the aggregate attachment point determine total cost.
• Ignoring contract basis. A 12/12 stop-loss contract priced against a 12/18 is a different product, not a better deal.
• Assuming the surplus refund is guaranteed. Refund terms vary more between carriers than almost any other provision. Some refund fully, some partially, some apply credits, some retain everything. Read the clause.
• Forgetting run-out liability. Claims incurred before termination but paid after still belong to the plan. Employers routinely discover this after deciding to switch.
• Being surprised by lasers at renewal. Ask about no-new-laser provisions before the first renewal, not during it.
• Underestimating plan sponsor duties. Self-funding brings ERISA fiduciary responsibility, plan document maintenance, Form 5500 filing above applicable thresholds, and PCORI fee remittance.
• Treating the decision as permanent. A group whose health profile deteriorates may find level-funded renewal pricing worse than the fully insured market. Model the exit before you need it.
• Changing funding without telling employees what stays the same. Employees hear "self-funded" and assume benefits are being cut. Usually the plan design and network are unchanged; say so clearly and early.

Frequently asked questions

Is a level-funded plan the same as a self-funded plan?

Structurally yes — it is self-funding with stop-loss, billed as a fixed monthly amount. ERISA governs it and state benefit mandates are generally preempted. The difference is the employer's experience of paying for it.

What is stop-loss insurance and why does every self-funded plan need it?

It protects the employer against catastrophic claims. Specific stop-loss caps exposure per person; aggregate stop-loss caps it for the whole group. Without it, one severe claim could exceed a small employer's entire annual health budget.

How many employees do you need to self-fund?

Level funding is commonly available from roughly 10 to 150 enrolled employees. Traditional self-funding has historically suited 100 to 200 or more. Reserves, risk tolerance and group health profile matter as much as headcount.

Do we get money back if claims come in low?

In level funding, possibly — terms vary widely and are not always a full refund. In true self-funding, yes, the saving is simply money you never spent.

What happens if we leave a self-funded plan mid-stream?

Run-out claims incurred before termination still have to be paid. Terminal liability coverage addresses this, but must be arranged deliberately.

Can an unhealthy group get a level-funded quote?

Often not on favourable terms, because these arrangements are typically medically underwritten. This is the same mechanism that produces savings for healthy groups.