Employers choosing between level funded vs fully insured health plans are choosing how much claims risk to keep and how many compliance duties come with it. Level funding has grown quickly among small and midsize employers because it offers the fixed monthly cost of insurance with some of the claims data and refund potential of self-funding.
This guide explains how each option works, how they differ in cost, risk and compliance, and what to check before switching.
How do level funded and fully insured plans compare?
| Level funded | Fully insured | |
|---|---|---|
| Monthly cost | Fixed for the plan year | Fixed for the plan year |
| Who carries claims risk | The employer, capped by stop-loss | The insurer |
| Pricing | Medically underwritten on the group | Small group: ACA community rating. Large group: may reflect the group’s experience |
| Upside | Possible surplus refund, on the contract’s terms | MLR rebate only if the insurer misses the federal standard |
| Downside | Higher renewal or decline after a bad year; run-out and terminal liability terms | Premium increases at renewal; no refund for a good year |
| Claims data | Usually more detailed reporting | Often limited, especially for small groups |
| State mandates | Generally do not apply to the plan | Apply |
| Best fit | Groups with stable, predictable claims and some tolerance for contract risk | Groups that want full risk transfer, have high expected claims, or want the simplest compliance |
What is Level Funded Health Insurance?
Level funded health insurance is a self-funded health plan packaged to look like an insured one. The employer pays a fixed monthly amount, and if the group’s claims come in below what was projected, part of the difference may come back as a surplus refund.
The monthly payment covers three things: administration, a fund for expected claims, and stop-loss insurance premiums. The budget stays level all year, and the employer gets more visibility into how its money is spent than a fully insured plan usually offers.
What sets level funding apart is who holds the risk. In a fully insured plan, the insurer carries all of it. In a level-funded plan, the employer is legally the party paying claims, and stop-loss insurance caps how much the employer can lose. Because of that, the IRS and DOL generally treat a level-funded plan as self-insured, which affects the plan’s compliance duties (see below).
How Does a Level Funded Plan Work?
A level-funded contract sets a fixed monthly payment based on actuarial projections for the group. That payment is split into three parts:
- Administration. Claims processing, member services, network access and plan management, usually through a third-party administrator (TPA) affiliated with the carrier.
- Claims fund. The money expected to pay employees’ claims during the year, set from the group’s demographics, claims history where available, and the carrier’s benchmarks.
- Stop-loss insurance. Specific stop-loss covers any one person’s claims above a set deductible. Aggregate stop-loss covers total claims above an attachment point, usually a percentage of expected claims. Together they keep the employer’s maximum cost close to the fixed monthly payment.
Two contract terms decide how a level-funded plan really performs:
- Surplus refunds. If claims are lower than the claims fund, the contract decides what happens to the difference. Some carriers return a share of it, some return it as a credit toward next year’s payments, and some pay it only if the employer renews. A refund is never guaranteed.
- Terminal liability and run-out. Claims incurred near the end of a plan year are often paid weeks or months later. If the employer leaves the arrangement, the contract decides who pays those run-out claims and whether stop-loss still applies to them. Some contracts include terminal liability coverage; others leave the employer responsible, or require a final settlement that can absorb any surplus.
Can Small Businesses Use Level Funded Plans?
Yes. Carriers offer level funding to groups that would not self-fund on their own, and for a growing group it often works as a step toward traditional self-funding. Minimum group size varies by carrier and state.
Level-funded plans are medically underwritten. The carrier looks at group size, industry, claims history and demographics before quoting, and a group with high expected claims may get a high quote or a decline. Fully insured small-group coverage, by contrast, is guaranteed issue under the ACA and priced with community rating.
Some states also regulate stop-loss policies sold to small employers, for example by setting minimum attachment points, which can limit or rule out level funding in those states.
What is Fully Insured Health Insurance?
Fully insured health insurance is the traditional model. The employer pays a fixed monthly premium to an insurance carrier, and the carrier takes full financial responsibility for covered claims. Whatever claims happen during the year, the employer’s cost is the premium.
Fully insured plans pool risk across many employers. Carriers set rates to cover expected claims, administration, taxes and fees, and profit. For small groups, the ACA limits what those rates can vary by: individual or family coverage, rating area, age (no more than 3 to 1 for adults) and tobacco use (no more than 1.5 to 1). The group’s own health status cannot be used. Large-group insured plans can be priced partly on the group’s experience.
Fully insured plans are regulated by the state insurance department, so they follow state benefit mandates, and small-group plans must cover the ACA essential health benefits package. Fully insured employers usually see less claims detail than self-funded ones, although the Consolidated Appropriations Act, 2021 bars contract terms that keep any group health plan from getting its own de-identified claims data.
Similarities and Differences
Level Funded and Fully Insured Differences
The core difference is risk. In a level-funded plan, the employer benefits from a good claims year and pays for a bad one at renewal, with stop-loss limiting the damage during the year. In a fully insured plan, the employer hands all claims risk to the carrier in exchange for a premium.
That difference in risk drives a set of compliance differences, because a level-funded plan is a self-insured plan in the eyes of federal law:
| Rule | Level funded (self-insured) | Fully insured |
|---|---|---|
| PCORI fee | The employer files IRS Form 720 and pays by July 31 after the plan year ends. The rate is $3.84 per covered life for plan years ending October 1, 2025 through September 30, 2026 | The insurer pays |
| Form 5500 | Plans with 100 or more participants file. Plans under 100 are exempt only if benefits are paid from the employer’s general assets, so a plan funded through a trust generally files | Plans with 100 or more participants file. Plans under 100 paid through insurance are exempt |
| State benefit mandates | Generally preempted by ERISA, since a self-funded plan is not treated as an insurer under state law. The stop-loss policy itself is still state-regulated | Apply, because state law regulates the insurance policy |
| ACA small-group rating and essential health benefits | Do not apply. The plan is underwritten on the group and does not have to cover the full EHB package, though federal rules such as the out-of-pocket maximum and preventive care still apply | Apply to small-group plans |
| Medical loss ratio rebates | Do not apply | Insurers must spend at least 80% (small group) or 85% (large group) of premiums on care and quality, or pay rebates |
| Nondiscrimination (Section 105(h)) | Applies. Eligibility and benefits cannot favor highly compensated individuals, or their reimbursements become taxable | The parallel ACA rule for insured plans has not been enforced, pending regulations the IRS has not issued |
Both types of plans are ERISA plans when sponsored by a private employer, so both need a plan document and summary plan description, and both must meet COBRA, HIPAA and the annual gag clause attestation.
Level Funded and Fully Insured Similarities
Both models give the employer a fixed monthly cost for the plan year, which makes budgeting simple. That sets both apart from traditional self-funding, where the monthly cost moves with claims.
For employees, the two usually feel the same. ID cards, provider networks and claims processes often look identical, and many carriers offer both arrangements using the same networks.
How to Transition from Fully Insured to Level Funded?
A move to level funding usually starts several months before renewal. Begin with your current plan: premiums, any claims data the carrier will release, employee demographics and how employees use the plan. Ask your carrier for de-identified claims data early, since level-funded carriers will want it for underwriting.
When comparing quotes, look past the monthly payment. Check:
- The specific stop-loss deductible and aggregate attachment point
- How surplus refunds are calculated, when they are paid, and whether you must renew to receive them
- Who pays run-out claims if you leave, and whether terminal liability coverage is included
- Renewal rate caps, if any, and how a large claim affects next year’s rate
- Which compliance tasks (PCORI, Form 5500, plan documents, nondiscrimination testing) the carrier or TPA handles and which stay with you
Ethos Benefits reviews renewal terms like these as part of its renewal work.
What About Self-Funded?
Traditional self-funding gives the employer the most control and the most risk. The employer pays claims as they come in, contracts separately with a TPA and a stop-loss carrier, and keeps all of the savings from a good year. Monthly costs move with claims, so cash flow is less predictable.
Level funding is a form of self-funding with the stop-loss and administration bundled by one carrier and the cost smoothed into a fixed monthly payment. Larger employers often move from level funding to traditional self-funding as they grow, to choose their own vendors and see more of their data. See stop-loss insurance for how the protection works in either case.
Bottom Line
The choice between level funded vs fully insured health plans comes down to how much claims risk and compliance work your organization is willing to take on in exchange for possible savings and more data.
Level-funded plans tend to fit groups with stable, predictable claims, the capacity to review claims reports, and the patience to read the refund and terminal liability terms closely. Savings depend on the group’s claims and the contract; they are not guaranteed.
Fully insured plans fit organizations that want the carrier to carry all of the risk, groups with high expected claims that would be priced poorly under underwriting, and employers that want the simplest compliance.
