Level-funded health plans, and how they compare with fully insured coverage
A level-funded health plan is a way some employers fund group medical coverage. The company typically pays a fixed monthly amount that is built from three parts: money set aside for expected claims, a fee for administration, and a premium for stop-loss insurance. The monthly amount is designed to stay level during the plan year, which is why the arrangement is called level-funded.
This is different from a traditional fully insured group policy, where the employer pays a premium to an insurance company and the insurer takes the claims risk under that policy.
Level-funded arrangements are generally treated as self-insured group health plans that use stop-loss insurance, not as a separate category of product created by a single federal statute. Availability, contract terms, and state stop-loss rules vary. This page explains the structure. It is not a recommendation that every company with 2 to 50 employees should use one, and it is not a claim that one design costs less than the other.
The three parts of the monthly amount
In a typical level-funded arrangement, the monthly funding includes:
- A claims fund. A portion of each payment is held to pay covered medical claims up to the points at which stop-loss insurance applies.
- Stop-loss insurance. A policy that reimburses the employer (or the plan) when claims exceed a set amount — an attachment point — for a single person, for the group as a whole, or both.
- Administration. Fees for claims processing, access to a provider network, and related services, often paid to a third-party administrator or to an insurer acting in an administrative role.
The U.S. Department of Labor has described how stop-loss insurance is used with self-insured group health plans, including by small employers: the contract covers claims costs that exceed an attachment point for a single enrollee, for aggregate claims over a period, or both. The employer remains responsible for claims below those attachment points. Stop-loss insurance generally protects the employer against losses; it does not usually guarantee the payment of benefits to plan participants.
If claims for the year come in below the amount funded for claims, some contracts provide that unused claims funding may be returned or credited. That is a contract term, not a federal rule, and it is not guaranteed. If claims run higher, the stop-loss policy is what limits further exposure — but only for claims the stop-loss contract actually covers. Exclusions or gaps in the stop-loss policy can leave the employer responsible.
How this compares with fully insured coverage
The table below is a structural comparison. It is not a cost comparison, and it is not an argument for either design.
| Fully insured group policy | Level-funded arrangement | |
|---|---|---|
| Monthly payment | A premium paid to the insurer | A fixed funding amount for expected claims, administration, and stop-loss |
| Who holds claims risk below any cap | The insurer, under the policy | The employer, up to the stop-loss attachment points |
| Protection against large claims | Built into the fully insured policy | Stop-loss insurance, on the terms of that contract |
| Unused claims funding | Not a feature of a fully insured premium | May be returned or credited if the contract provides for it |
| State insurance rules | Fully insured policies are generally issued under state insurance law | Stop-loss and self-insured plan rules can differ from fully insured small-group rules; this varies by state |
| Employer responsibilities | Still an employer-sponsored plan, with ERISA and notice duties that apply to the plan | Often more plan-sponsor and funding responsibility, because the employer is closer to the claims |
A fully insured plan is the right answer for many companies in this size range. A level-funded plan can be a fit when the census, the stop-loss terms, and the employer's tolerance for plan-sponsor responsibility line up. We will put both on the table when both are available, and we will say so when one of them is not.
What we review before anyone signs
- The specific and aggregate attachment points, and what happens if a claim is not covered by stop-loss
- Whether unused claims funding can be returned, and on what conditions
- State rules that apply to stop-loss sold to employers of this size
- ERISA plan documents, a summary plan description, and the notices the plan will have to send
- How the arrangement compares with a fully insured or SHOP plan, and with an ICHRA or QSEHRA, on the same census
- The renewal and run-out terms, so the end of the year is as clear as the beginning
We will not use a savings percentage, a typical surplus figure, or a claim that level-funded coverage is "cheaper" or "better." Those numbers, if they exist at all, belong to a specific quote.
Frequently asked questions
Is a level-funded plan the same as a fully self-funded plan with no cap?
No. A level-funded arrangement is a self-insured design that uses stop-loss and a fixed monthly funding amount so the employer's cash outlay is meant to stay level during the year. The employer still has responsibility for claims below the attachment points and for claims the stop-loss contract does not cover. We do not treat "uncapped" self-funding as a standard recommendation for companies with 2 to 50 employees.
Can a company with 15 employees buy a level-funded plan?
Sometimes. Underwriting, minimum participation, and state stop-loss rules all affect availability. We will check whether a contract can actually be issued for your census rather than assume it can.
Does stop-loss mean employees cannot have a large claim denied?
No. Stop-loss is generally coverage for the employer, not a second health policy for the employee. Benefits are determined under the employer's plan. The Department of Labor has noted that stop-loss insurance does not usually guarantee payment of benefits to participants.
Will we get money back if claims are low?
Only if the contract says so, and only on the terms it sets. Treat any surplus provision as a contract term to be read, not as an expected refund.