Employers comparing level funded vs self funded health plans are really comparing two versions of the same idea. In both, the plan pays its own claims and stop-loss insurance caps the losses. What changes is who packages the pieces, who chooses the vendors, how the money moves each month and what happens when the arrangement ends.
If you are instead weighing self-funding against a traditional insured plan (sometimes called “fully funded”), see self-funded vs. fully insured and level funded vs. fully insured.
Level funded vs. self-funded at a glance.
The short version: a level-funded plan trades control for predictability, and a traditional self-funded plan trades predictability for control.
| Level funded | Traditional self-funded | |
|---|---|---|
| Bundling | One carrier (or its affiliated TPA) packages administration, network, pharmacy and stop-loss in one contract | The employer contracts separately with a TPA, network, PBM and stop-loss carrier |
| Who sets the stop-loss | The carrier, usually from a short menu of specific deductibles and a built-in aggregate attachment point | The employer and its advisor, by shopping stop-loss carriers and choosing deductibles, contract basis and terms |
| Vendor choice | Limited to the carrier’s own TPA, network and PBM | Open: each vendor can be chosen and replaced on its own |
| Data access | Standard carrier reports; detail varies by product | Full claims and pharmacy data from the TPA and PBM, usually in more detail |
| Cash flow | Fixed monthly payment all year | Fixed administrative and stop-loss costs plus claims, which move month to month |
| Surplus | Any unspent claims fund is shared or credited on the contract’s terms, and some contracts require renewal to receive it | The employer keeps all of it, because claims money that is never spent is never paid out |
| Terminal liability | Set by the contract: run-out may be included, or a final settlement may absorb the surplus | The employer owes run-out claims after the plan ends unless the stop-loss policy has terminal liability coverage |
| Changing PBM or TPA | Usually not possible mid-contract; changing means leaving the whole bundle | Possible at each vendor’s renewal, subject to contract terms and stop-loss coordination |
| Underwriting | The carrier quotes on the group’s demographics and claims history and may decline the group | Stop-loss carriers underwrite the group and may laser high-cost members |
| Admin work for the employer | Lower: the carrier handles most tasks | Higher: the employer oversees several vendors and the claims account |
Both are ERISA plans when a private employer sponsors them, and federal law generally treats both as self-insured. That shared status is why the compliance duties below are largely the same.
What is a level-funded plan?
A level-funded plan is a self-funded plan with a fixed monthly payment. The employer pays one amount each month, set by the carrier from actuarial projections, and that payment covers three things:
- Administration. Claims processing, member services, network access and plan management, usually through the carrier’s own TPA.
- A claims fund. The money expected to pay the group’s claims during the year.
- 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, so the employer’s cost stays close to the fixed payment even in a bad year.
If claims come in under the claims fund, the contract decides what happens to the difference. Some carriers return a share in cash, some credit it toward next year, and some pay it only if the employer renews. A refund is never guaranteed. If claims run high, the employer’s cost does not change during the year, but the next renewal will likely be higher, or the carrier may decline to renew.
Level funding is common among smaller employers. KFF’s 2025 Employer Health Benefits Survey found that 37 percent of covered workers at firms with 10 to 199 workers were in a level-funded plan. For more detail on how these plans are built, see level-funded health insurance.
What is a traditional self-funded plan?
In a traditional self-funded plan, the employer pays claims as they occur and builds the plan from separate vendors. The usual parts are:
- A claims account the employer funds, from which the TPA pays claims.
- A third-party administrator (TPA) that processes claims, issues ID cards and provides reporting.
- A provider network and a PBM, which may be chosen independently of the TPA.
- Stop-loss insurance, bought from a stop-loss carrier, with specific and aggregate coverage the employer selects.
Self-funding is the most common way large employers provide coverage. KFF’s 2025 survey found that 67 percent of covered workers across all firm sizes were in self-funded plans, a figure that includes level-funded plans.
Because each vendor is separate, the employer can design benefits, change a PBM without changing a TPA, add direct contracts or reference-based pricing, and see its own claims data in detail. In exchange, the employer handles more oversight and carries more month-to-month cash flow risk.
How does stop-loss work in each model?
Both models use the same two types of stop-loss, but the employer controls far more of the terms in a traditional self-funded plan.
- Specific stop-loss reimburses the plan when one person’s claims pass the specific deductible.
- Aggregate stop-loss reimburses the plan when total claims pass the aggregate attachment point, usually a percentage of expected claims. See aggregate stop-loss for how that is set.
In a level-funded plan, the carrier picks the contract basis and most terms, and the aggregate protection is built into the fixed payment. In a traditional self-funded plan, the employer chooses the specific deductible, the contract basis (for example 12/12, 12/15 or paid), whether to buy terminal liability coverage, and whether to negotiate provisions such as a renewal rate cap or no new lasers. Aggregate reimbursement in a traditional plan is often settled after the year ends, so the employer may carry a high-claims year in cash for several months unless the policy includes monthly aggregate accommodation.
State law also matters. The DOL notes that states may set minimum attachment points for stop-loss policies sold to small employers. Under the NAIC model law, a specific attachment point cannot be below $20,000, and a group of 50 or fewer cannot have an aggregate attachment point below the greatest of $4,000 per group member, 120 percent of expected claims or $20,000. States that adopt the model can change those amounts, and many states have none. Stop-loss insurance covers attachment points, contract types and lasering in more detail.
How do cash flow, surplus and terminal liability differ?
The biggest practical differences show up in how money moves during the year and when the plan ends.
Cash flow. A level-funded employer writes the same check every month. A traditional self-funded employer pays fixed costs plus whatever claims come in, so a month with a premature birth or a cancer diagnosis can be expensive until stop-loss reimburses. Employers that self-fund usually keep a reserve for this reason.
Surplus. In a traditional self-funded plan, every dollar of claims that does not happen stays with the employer, because it was never paid out. In a level-funded plan, the employer prepays the claims fund, and the contract decides how much of any surplus comes back and when.
Terminal liability. Claims incurred near the end of a plan year are often paid weeks or months later. When a traditional self-funded plan ends or moves to an insured plan, the employer still owes those run-out claims, plus any TPA run-out fees, unless the stop-loss policy includes terminal liability coverage. A level-funded contract may include run-out coverage, or may hold back part of the surplus to settle it. Read these terms before signing either kind of contract, not when you are leaving.
Which model gives more data and flexibility?
A traditional self-funded plan gives the employer more data and more room to change vendors.
The Consolidated Appropriations Act, 2021 bars group health plans from entering contracts that keep the plan from getting its own de-identified claims and encounter data, or from sharing it with a business associate such as an advisor. That rule applies to both models. In practice, a traditional self-funded plan’s TPA and PBM usually provide more detailed reporting, and the employer can send that data to analysts or other vendors. Level-funded reporting is often more standardized.
Vendor flexibility is where the two models differ most. In a level-funded plan, the network, TPA, PBM and stop-loss come as one package, so replacing the PBM usually means leaving the whole arrangement. In a traditional self-funded plan, each contract can be reviewed and replaced on its own schedule, as long as stop-loss terms are coordinated with the change. When comparing stop-loss carriers or contract terms, Ethos reviews and places stop-loss through its stop-loss service.
What compliance duties do both plans share?
Because federal law treats both as self-insured, most compliance duties are the same in either model.
| Rule | Level funded | Traditional self-funded |
|---|---|---|
| PCORI fee | The employer files IRS Form 720 and pays 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 | Same |
| Form 5500 | Plans with 100 or more participants file. Smaller plans are exempt only if benefits are paid from the employer’s general assets or through insurance, so a plan funded through a trust generally files | Same |
| State benefit mandates | Generally preempted by ERISA for the plan itself. The stop-loss policy is still state-regulated | Same |
| Gag clause attestation | Required each year, often filed by the carrier’s TPA on the plan’s behalf | Required each year, often filed by the TPA under a written agreement |
| Section 105(h) nondiscrimination | Applies | Applies |
The practical difference is who does the work. A level-funded carrier often handles more of these tasks as part of the bundle. In a traditional self-funded plan, the employer needs to confirm in writing which vendor handles each one. See Form 5500 deadline for filing dates.
Which model fits which employer?
The choice depends on how much variability, oversight and vendor management the employer wants to take on.
A level-funded plan tends to fit employers that:
- Want a fixed monthly cost and minimal administration
- Have stable, predictable claims and can pass the carrier’s underwriting
- Are comfortable with the carrier’s network, PBM and reporting
A traditional self-funded plan tends to fit employers that:
- Can carry month-to-month claims swings and keep a reserve
- Want to choose or change their TPA, PBM, network and stop-loss carrier separately
- Want detailed claims data and the ability to add programs such as direct contracts
- Have staff or advisors to oversee several vendors
Many employers start in a level-funded plan and move to traditional self-funding as they grow and want more control. Moving the other way is possible too, usually after a run of high claims. Either way, the move happens at renewal, and the run-out terms of the old contract and the run-in terms of the new stop-loss policy decide whether any claims fall through the gap.
Key questions before you compare quotes.
Whichever model you are looking at, ask:
- What are the specific deductible and aggregate attachment point, and is the contract 12/12, 12/15 or paid?
- Are any members lasered, and is there a renewal rate cap or a no-new-laser provision?
- How is a surplus calculated, when is it paid, and must you renew to receive it?
- Who pays run-out claims if you leave, and is terminal liability coverage included?
- Can you get claims and pharmacy data in a usable format, and share it with your advisor?
- Which compliance tasks does each vendor handle in writing, and which stay with you?
