Level-Funded and Self-Funded Plans: What Small Employers Take On

When a small employer shops for health coverage, the quotes may include more than traditional insured plans. Level-funded plans, a form of self-funding aimed at small and mid-sized employers, are one of them. They can look like ordinary insurance, with a fixed monthly payment and a familiar insurer's name, but the legal structure underneath is different.

This guide explains, at a general level, how fully insured, self-funded and level-funded plans differ, what changes for you as the employer, and what to ask before you sign. It does not recommend any type of plan. It is general information, not insurance, tax or legal advice; a licensed agent or broker, an ERISA attorney and your state insurance department can help with a specific decision.

Three ways to fund a health plan

The difference comes down to who pays the claims.

• Fully insured. The employer buys a group health insurance policy, and the insurance company pays covered claims. The National Association of Insurance Commissioners (NAIC) notes that state insurance regulators help oversee insurance plans that employers purchase.
• Self-funded. The employer pays claims itself. The Department of Labor's guide to fiduciary responsibilities under group health plans (September 2023) describes a self-funded plan as one paid from the employer's general assets. HealthCare.gov's glossary adds that a self-insured employer can contract with a third party administrator for services such as enrollment, claims processing and provider networks, or run the plan itself.
• Level-funded. An analysis prepared for the Department of Labor's report on self-insured group health plans (Appendix B, September 2024) describes a level-funded plan as a nominally self-funded option for small or mid-sized employers that incorporates stop-loss insurance with relatively low attachment points.

Stop-loss coverage is the piece that makes self-funding manageable for a smaller employer. The NAIC's glossary describes stop-loss, or excess loss, policies as coverage for a health plan or a self-insured employer plan against the risk that any one claim, or the plan's total losses, will exceed a specified dollar amount.

How a level-funded plan works

The same DOL-published analysis describes the usual mechanics. Often the insurer calculates an expected monthly expense for the employer that includes a share of the estimated annual cost of benefits, the premium for stop-loss protection and an administrative fee. The employer pays this "level premium," with the potential for some reconciliation between the employer and the insurer at the end of the year if claims differ significantly from the estimate.

The analysis also notes that because employers often pay a monthly amount that resembles a premium, survey respondents may be confused about whether their plan is self-funded or insured. If you aren't sure which kind of plan you have, ask your insurer or administrator to tell you in writing.

The regulatory difference

This is the part most worth understanding before you switch. The NAIC explains that state insurance regulators help oversee insurance plans that employers purchase, while the U.S. Department of Labor generally oversees self-insured employer plans.

The DOL-published analysis states that level-funded policies are sold as self-funded plans, so they generally are not subject to state requirements for insured plans and, for those sold to employers with fewer than 50 employees, are not subject to the Affordable Care Act's rating and benefit standards for small firms. The federal small-group rules in 45 CFR part 147, such as guaranteed availability, are written for health insurance issuers that sell coverage in the small group market. In practice, that means the small-group protections described in our guide Small-Group Health Insurance: How It Works for Small Employers may not apply in the same way, and state benefit mandates for insured plans may not reach your plan. The stop-loss policy itself is insurance, but it protects the employer, not the employees.

Other rules shift too. The Department of Labor's guide explains that self-funded plans generally must follow Department of Labor procedures for external review of denied claims, while insured plans generally follow their state's process. HealthCare.gov notes that the federal coverage reporting requirement applies to health insurance companies and to self-insuring employers of any size, so a small self-funded employer can take on IRS reporting that an insurer would otherwise handle.

What changes for you as the employer

Self-funding, including level-funding, usually gives the employer a larger role in running the plan.

• Fiduciary status. The Department of Labor's guide says most employers that sponsor fully or partially self-funded group health plans exercise some discretionary authority and are therefore fiduciaries, with duties that include acting prudently and solely in the interest of plan participants and their beneficiaries.
• Employee contributions. Under the same guide, money from the employer's general assets isn't plan assets, but participant contributions withheld or received are, and must be handled accordingly.
• Choosing and monitoring vendors. The guide treats hiring a service provider as a fiduciary function and recommends comparing several providers using the same information, documenting the process and reviewing performance and fees at reasonable intervals.
• Annual reporting. The guide says a group health plan with fewer than 100 participants, whether insured or self-funded, generally doesn't need to file the Form 5500 annual report. The DOL's Reporting and Disclosure Guide (December 2022) ties that exemption to plans that are unfunded or fully insured, so a plan that holds assets in a trust should confirm its filing status.

For example, imagine a hypothetical 30-person engineering firm comparing a fully insured renewal with a level-funded quote. The level-funded quote may look attractive, but the owner also becomes responsible for decisions an insurer used to make, such as overseeing the administrator and handling employee contributions.

Questions to ask before choosing

Answers to these questions will differ by contract, so get them in writing.

1. At what per-person and whole-plan dollar amounts does the stop-loss coverage start to pay (the attachment points), and what exactly does the stop-loss policy exclude?
2. If claims come in under expectations, what portion of any surplus comes back, and when? If they come in higher, could you owe more?
3. What happens to claims incurred before the contract ends but submitted afterward?
4. How will next year's rate be set, and how could this year's claims affect it?
5. Who is the plan's named fiduciary, and who decides benefit appeals?
6. Which state laws, if any, apply to this plan?
7. Who prepares the plan document, the summary plan description and any required filings?

A licensed broker or consultant can help you compare answers, and you can ask your state insurance department how stop-loss coverage is regulated in your state.

Watch for arrangements that aren't what they claim

Some health "plans" sold to small businesses are not legitimate self-funded plans at all. The Department of Labor's guide to multiple employer welfare arrangements (MEWAs), revised April 2022, warns that promoters have marketed coverage to small employers at rates well below regulated insurers by claiming to be ERISA plans exempt from state insurance regulation. In practice, the guide says, a number of MEWAs could not pay claims because of insufficient funding and inadequate reserves, and in the worst cases operators drained assets through excessive fees and embezzlement. It also notes that Congress amended ERISA in 1983 so that states can apply their insurance laws to MEWAs. If an offer covers several unrelated employers and seems far cheaper than everything else, check with your state insurance department before you sign.

Key takeaways

• In a fully insured plan the insurer pays claims; in a self-funded plan the employer does; a level-funded plan pairs self-funding with stop-loss insurance and a fixed monthly payment.
• A DOL-published analysis describes level-funded plans as nominally self-funded, with a level monthly payment that may be reconciled at the end of the year.
• Level-funded plans generally aren't subject to state insured-plan requirements or, for groups under 50, the ACA's small-group rating and benefit standards.
• Self-funding usually makes the employer a fiduciary with duties to choose and monitor vendors prudently.
• Be wary of cut-rate multiple-employer arrangements that claim to be exempt from state regulation.

Sources

• U.S. Department of Labor, Employee Benefits Security Administration, Self-Insured Health Benefit Plans 2025, Appendix B (analysis prepared for the Department, September 30, 2024)
• National Association of Insurance Commissioners, Glossary of Insurance Terms
• HealthCare.gov, Glossary: Self-insured plan
• U.S. Department of Labor, EBSA, Reporting and Disclosure Guide for Employee Benefit Plans (December 2022)
• Electronic Code of Federal Regulations, 45 CFR Part 147 Health Insurance Reform Requirements for the Group and Individual Health Insurance Markets
• U.S. Department of Labor, Employee Benefits Security Administration, Understanding Your Fiduciary Responsibilities Under a Group Health Plan (September 2023)
• U.S. Department of Labor, Employee Benefits Security Administration, MEWAs: Multiple Employer Welfare Arrangements under ERISA, A Guide to Federal and State Regulation (revised April 2022)
• National Association of Insurance Commissioners, Health Insurance consumer guide
• HealthCare.gov, How the Affordable Care Act affects small businesses