# What is level-funded health insurance? How it works, pros and cons.

Source: https://ethosbenefits.com/benefits-101/level-funded-health-insurance
Type: Benefits 101
Topic: Plan financing
Author: Meghan Anderson, Account Executive
Reviewed by: Patrick Ansara, Partner and Director of Client Operations
Publisher: Ethos Benefits
Published: 2025-08-01
Last updated: 2026-11-03
Cite as: "What is level-funded health insurance?," Ethos Benefits, https://ethosbenefits.com/benefits-101/level-funded-health-insurance, updated 2026-11-03.

**Short answer:** Level-funded health insurance is a self-funded health plan with a fixed monthly payment. The payment covers a claims fund, stop-loss insurance and administration. If claims come in under the fund, the employer may get part of the surplus back, but it takes on self-insured compliance duties and contract risk at renewal and termination.

**Level-funded health insurance** gives an employer a fixed monthly health plan cost while the plan itself is self-funded underneath. It has become common among small and midsize employers. The [2025 KFF Employer Health Benefits Survey](https://www.kff.org/health-costs/2025-employer-health-benefits-survey/) found that 37 percent of covered workers at firms with 10 to 199 workers are in a level-funded plan.

This guide explains what a level-funded plan is, where the monthly payment goes, how surplus refunds and run-out work, and the pros and cons employers should weigh. For a side-by-side look at cost, risk and compliance against traditional insurance, see [level funded vs. fully insured](https://ethosbenefits.com/benefits-101/level-funded-vs-fully-insured).

## What is a level-funded plan?

A level-funded plan is a self-funded group health plan packaged to behave like an insured one. The employer pays the same amount every month, a carrier or third-party administrator (TPA) pays claims, and stop-loss insurance caps the employer's losses.

The legal difference from fully insured coverage is who owes the claims. In a fully insured plan, the insurance company does. In a level-funded plan, the employer's plan does, and stop-loss insurance reimburses the plan above set limits. That is why level-funded plans are treated as self-insured for federal tax and benefits rules.

Federal regulators have noticed how much these plans look like insurance. In a July 2023 proposed rule, the Departments of Labor, Health and Human Services and the Treasury described level funding as increasingly popular, especially among small employers, and asked for public comment on how the arrangements are designed and whether plan sponsors need more guidance on their obligations. That was a request for information, not a new rule.

## Where does the monthly payment go?

The monthly payment goes to three places: a claims fund, a stop-loss premium and administration. Each month's payment is set before the plan year starts, based on the carrier's projection for the group:

| Part | What it pays for | What to check |
| --- | --- | --- |
| **Claims fund** | Expected employee claims for the year, up to the stop-loss limits | How the expected claims were set, and what share of the payment goes to the fund |
| **Stop-loss premium** | Insurance that reimburses the plan for large individual claims and for total claims above a cap | The specific deductible, the aggregate attachment point and the contract basis |
| **Administration** | Claims processing, network access, member service, ID cards and reporting, usually through a TPA tied to the carrier | Which compliance filings and notices are included |

**The claims fund** is the part that can produce a refund. It is set from the group's census, any claims history the prior carrier will release and the carrier's own benchmarks. Claims are paid out of it throughout the year.

**Stop-loss insurance** is what keeps the payment level. Specific stop-loss reimburses any one person's claims above a per-person deductible. Aggregate stop-loss reimburses total plan claims above an attachment point, usually set as a percentage of expected claims. Some states limit how low these points can go for small employers; the NAIC model act sets a $20,000 floor for specific attachment points, and states that adopt it may change the amounts. See [how stop-loss insurance works](https://ethosbenefits.com/benefits-101/stop-loss-insurance) and [aggregate stop-loss](https://ethosbenefits.com/benefits-101/aggregate-stop-loss) for the details.

**Administration** is a fixed fee per employee per month. In carrier-packaged level funding, the TPA, network and stop-loss usually come as one bundle from the same company.

## How do surplus refunds work?

A surplus refund is money returned when claims for the plan year come in below the claims fund. It is never guaranteed, and the contract, not the employer's results alone, decides how much comes back.

Contracts differ on several points:

- **How much is returned.** Some contracts return the full surplus, others a set share, and some cap the refund.
- **When it is calculated.** The carrier usually waits for claims incurred during the year to be paid, so the refund is figured some months after the plan year ends.
- **What form it takes.** Some carriers pay cash, some credit it toward next year's payments, and some split it.
- **Whether you must renew.** Some contracts pay a surplus only if the employer renews. If you leave, the surplus may go toward run-out claims or be kept by the carrier.
- **How deficits are handled.** Check whether a prior year's deficit can be offset against a later surplus.

## Who pays run-out claims when you leave?

The level-funded contract decides who pays run-out claims, which are claims for care received during the plan year but paid after it ends. In any self-funded plan, someone has to pay them, and level funding is no exception.

While the employer renews, run-out is mostly invisible. It matters when the employer leaves the level-funded arrangement, for example to return to fully insured coverage or move to a different self-funded setup. At that point the contract decides:

- Whether the carrier keeps paying run-out claims from the claims fund
- Whether stop-loss still covers large run-out claims, often called terminal liability coverage
- Whether any surplus is held back until run-out is settled
- Whether the employer owes anything beyond its last monthly payment

Some contracts include terminal liability coverage; others leave the employer responsible for run-out or require a final settlement. Read these terms before signing, not when you are ready to leave. The [stop-loss guide](https://ethosbenefits.com/benefits-101/stop-loss-insurance) explains contract bases such as 12/12 and 12/15, which decide which run-out claims stop-loss will reimburse.

## What happens at renewal after a bad year?

After a bad year, the employer usually pays more at renewal. Stop-loss protects the employer during the plan year, but it does not protect next year's price. A level-funded plan is underwritten on the group's own claims, so a bad year usually shows up at renewal.

After a high-claims year, an employer may see:

- **A higher monthly payment**, sometimes much higher than a fully insured small-group increase would have been
- **A laser**, where the stop-loss carrier sets a higher specific deductible for one member with known high costs, so the plan carries more of that person's claims
- **A decline**, where the carrier will not renew the group at all

Small groups are more exposed to this than large ones, because one serious diagnosis can move the whole group's results. Fully insured small-group plans are guaranteed issue under the ACA, so an employer that is declined for level funding can usually return to insured coverage. Some employers negotiate a renewal rate cap or a "no new laser" provision up front. Ethos Benefits reviews these terms when it [shops and audits stop-loss contracts](https://ethosbenefits.com/services/stop-loss).

## What are the pros and cons of level funding?

Level funding fits some groups well and others poorly. The trade-offs in short:

| Pros | Cons |
| --- | --- |
| Fixed monthly cost for the plan year | Underwritten on the group, so high-claims groups pay more or are declined |
| Possible surplus refund in a good year | Refund terms vary, and some require renewal |
| More claims reporting than most small fully insured plans | Self-insured compliance duties stay with the employer |
| Not subject to state benefit mandates or ACA small-group rating | Renewal increases and lasers after a bad year |
| Stop-loss caps losses during the year | Run-out and terminal liability terms can create exposure on exit |

### The pros

**Predictable budget.** The monthly payment does not change during the plan year, even if claims run high, because stop-loss absorbs the excess.

**Refund potential.** A fully insured employer gets nothing back from a good year beyond any medical loss ratio rebate. A level-funded employer may get part of the unused claims fund back, depending on the contract.

**Pricing based on the group.** A group with low expected claims may get a lower quote than ACA community-rated small-group coverage. That same feature works against groups with high expected claims.

**Claims data.** Level-funded plans usually provide regular reports on how the plan is used and where money goes. Detail varies by carrier, and it is often less than a traditional self-funded plan provides.

**Plan design room.** As self-funded plans, level-funded plans are generally not subject to state benefit mandates or the ACA's small-group essential health benefits requirement. In practice, carrier-packaged level funding often limits employers to the carrier's menu of plan designs and networks.

### The cons

**Underwriting.** The carrier reviews the group's census and claims before quoting. Groups with known high-cost conditions may see high quotes or none.

**Contract risk.** Refunds, run-out and renewals all depend on contract terms that differ from carrier to carrier and are easy to overlook.

**Compliance duties.** The employer takes on self-insured plan obligations that the insurer would otherwise handle (see below).

**Dependence on the projection.** If the carrier sets the claims fund high, the employer pays more each month and hopes for a refund. If it sets the fund low, there is little room for a refund and stop-loss does more of the work, which can drive up the renewal.

**Small-group volatility.** The smaller the group, the more one large claim can affect results, refunds and renewal pricing. Minimum group sizes vary by carrier and state.

## What compliance duties come with level funding?

Because a level-funded plan is self-insured, the employer, as plan sponsor, owns several obligations that an insurer handles for a fully insured plan. A TPA often helps, but the responsibility stays with the employer.

| Duty | What it requires |
| --- | --- |
| **PCORI fee** | File IRS Form 720 and pay by July 31 of the year after the plan year ends. The rate is $3.84 per covered life for plan years ending October 1, 2025 through September 30, 2026 |
| **ACA coverage reporting** | Self-insured employers of any size report coverage. Employers that are not applicable large employers use Forms 1094-B and 1095-B; applicable large employers report on Forms 1094-C and 1095-C |
| **Section 105(h) nondiscrimination** | Eligibility and benefits cannot favor highly compensated individuals, or their excess reimbursements become taxable |
| **COBRA premiums** | The applicable premium is set in advance for a 12-month period, either as a reasonable actuarial estimate of cost or by the past cost method, and COBRA participants can be charged up to 102 percent of it |
| **Form 5500** | Plans with 100 or more participants file, and smaller plans funded through a trust generally do too. See the [Form 5500 deadline guide](https://ethosbenefits.com/benefits-101/form-5500-deadline) |
| **Plan document and SPD** | Like any private-employer ERISA plan, a level-funded plan needs a written plan document and a [summary plan description](https://ethosbenefits.com/benefits-101/summary-plan-description) |

Prescription drug data collection reporting, the gag clause attestation, HIPAA and the ACA's out-of-pocket limit and preventive care rules also apply. Check in writing which of these the carrier or TPA files for you.

## Is level funding right for your group?

Level funding tends to fit groups with stable, moderate claims, enough cash and staff to review reports and contract terms, and the willingness to accept a possible renewal increase after a bad year. It tends to fit poorly for groups with known high-cost conditions, employers that cannot absorb a sharp renewal, and employers that want the carrier to handle every compliance filing.

Some employers use level funding as a step toward traditional self-funding, where they choose their own TPA, stop-loss carrier and pharmacy benefit manager and keep more control over data. See [level funded vs. self-funded](https://ethosbenefits.com/benefits-101/level-funded-vs-self-funded) for how the two compare, and [self-funded health insurance pros and cons](https://ethosbenefits.com/benefits-101/self-funded-health-insurance-pros-and-cons) for the wider picture.

## On the podcast

- [Reference-Based Pricing for Employers, Part 1: Danielle Young of ClaimDoc](https://ethosbenefits.com/podcast/reference-based-pricing-danielle-young), The Business of Benefits, Episode 55

## Frequently asked questions

### What does level funded mean in health insurance?

Level funded means the employer pays the same amount every month for a health plan that is self-funded underneath. The payment covers a claims fund, stop-loss insurance and administration, and stop-loss absorbs claims above set limits so the monthly cost stays level during the plan year. If claims come in low, part of the unused claims fund may come back.

### Is level-funded insurance considered insurance?

Not in the legal sense. The employer's plan owes the claims, and the stop-loss policy behind it insures the employer rather than employees, so a level-funded plan is treated as self-insured for federal tax and benefits rules. That means duties such as the PCORI fee and Section 105(h) nondiscrimination fall on the employer rather than an insurer.

### Are level-funded plans good?

They can be a good fit for a growing group with stable, moderate claims that wants a fixed monthly cost while it builds claims history, and many employers use level funding as a step toward traditional self-funding. They fit poorly for groups with known high-cost conditions or little room to absorb a sharp renewal, because pricing is based on the group's own claims.

### Are surplus refunds guaranteed in a level-funded plan?

No. A refund happens only if claims come in below the claims fund, and the contract decides how much comes back, when, and whether the employer must renew to receive it. Some contracts pay the surplus as a credit toward the next year rather than in cash.

### What happens if claims are higher than expected in a level-funded plan?

Stop-loss insurance pays claims above the specific deductible and the aggregate attachment point, so the employer's monthly payment does not change during the year. The cost usually shows up at renewal as a higher rate, a laser on a high-cost member, or a decline.

### Do level-funded plans have to pay the PCORI fee?

Yes. Because the plan is self-insured, the employer files IRS Form 720 and pays the fee by July 31 of the year after the plan year ends. The rate for plan years ending October 1, 2025 through September 30, 2026 is $3.84 per covered life.

### What should an employer ask before signing a level-funded contract?

Ask for the specific deductible and aggregate attachment point, how the surplus is calculated and paid, who pays run-out claims if you leave, how renewals and lasers are handled, and which compliance filings the carrier or TPA handles for you.

## Sources

1. [Patient-Centered Outcomes Research Trust Fund Fee, Questions and Answers](https://www.irs.gov/affordable-care-act/patient-centered-outcomes-research-trust-fund-fee-questions-and-answers), Internal Revenue Service
2. [Information Reporting by Providers of Minimum Essential Coverage](https://www.irs.gov/affordable-care-act/employers/information-reporting-by-providers-of-minimum-essential-coverage), Internal Revenue Service
3. [26 CFR § 1.105-11, Self-insured medical reimbursement plans](https://www.law.cornell.edu/cfr/text/26/1.105-11), Legal Information Institute, Cornell Law School
4. [26 U.S. Code § 4980B, Failure to satisfy continuation coverage requirements of group health plans](https://www.law.cornell.edu/uscode/text/26/4980B), Legal Information Institute, Cornell Law School
5. [Technical Release 2014-01: Guidance on State Regulation of Stop-Loss Insurance](https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/14-01), U.S. Department of Labor, Employee Benefits Security Administration
6. [Short-Term, Limited-Duration Insurance; Independent, Noncoordinated Excepted Benefits Coverage; Level-Funded Plan Arrangements; and Tax Treatment of Certain Accident and Health Insurance (CMS-9904-P)](https://www.cms.gov/newsroom/fact-sheets/short-term-limited-duration-insurance-independent-noncoordinated-excepted-benefits-coverage-level), Centers for Medicare & Medicaid Services