What is self-funded health insurance?
Self-funded health insurance, also called a self-insured medical plan, is a group health plan where the employer pays its employees’ medical and pharmacy claims instead of paying a fixed premium to an insurance company. The employer takes on the claims risk that a carrier would carry in a fully insured plan.
“Self-funded health insurance” is a slight misnomer. The plan itself is not an insurance policy. It is an employee benefit plan the employer sponsors, governed by a written plan document. The only insurance in a typical self-funded setup is stop-loss, which protects the employer, not the employees.
Self-funding is the most common way covered workers in the U.S. get employer coverage. In the KFF 2025 Employer Health Benefits Survey, 67% of covered workers were in self-funded plans, including 80% at firms with 200 or more workers and 27% at firms with 10 to 199 workers.
| Fully insured | Self-funded | |
|---|---|---|
| Who carries claims risk | The insurance carrier | The employer, above which stop-loss reimburses |
| What the employer pays | A fixed monthly premium | Actual claims, plus fixed costs for administration and stop-loss |
| Main regulator | State insurance law and federal law | Federal law (ERISA, the Internal Revenue Code, the ACA, HIPAA) |
| State benefit mandates and premium taxes | Apply | Generally do not apply to the plan |
| Plan design | Chosen from the carrier’s options | Written by the employer, within federal rules |
| Claims data | Often summary reports | The plan’s own claims-level data |
| Unused claims money | Stays with the carrier | Stays with the employer |
For a full side-by-side, see self-funded vs. fully insured.
How does the money flow?
In a self-funded plan, money moves through four pieces: the claims fund, the TPA, the PBM and stop-loss. The employer and employees fund the plan, the vendors pay claims from it, and stop-loss refills it when claims run high.
- Funding. The employer budgets an expected claims amount for the year, usually set with help from an underwriter or actuary, and collects employee contributions through payroll. Many employers deposit money into a dedicated claims account each month or each week.
- Claims are incurred. An employee sees a doctor or fills a prescription. The provider bills the plan, through the TPA for medical claims and through the PBM for prescriptions.
- Claims are paid. The TPA reprices the medical claim to the network rate (or another pricing method), checks it against the plan document, and pays it from the employer’s claims account. The PBM pays pharmacies and bills the plan for drug claims, usually weekly or every two weeks.
- Fixed costs are paid. The employer pays the TPA’s administrative fee, any network access fee, the PBM’s fees, and the stop-loss premium, usually per employee per month.
- Stop-loss reimburses. When one person’s claims pass the specific deductible, or the whole group’s claims pass the aggregate attachment point, the stop-loss carrier reimburses the plan for the excess.
The result is a cost that moves with actual claims. In a good year, the money not spent on claims stays with the employer. In a bad year, the employer pays more, up to the limits stop-loss sets. Monthly cash needs also swing, because claims do not arrive evenly. Some employers choose a level-funded plan instead, which spreads the expected cost into a fixed monthly payment.
Which vendors does a self-funded plan use?
A self-funded employer hires vendors to do the work a carrier does in a fully insured plan. Each one is a separate contract, which means each can be chosen, measured and replaced on its own.
| Vendor | What it does |
|---|---|
| Third-party administrator (TPA) | Processes and pays claims, handles eligibility and member service, issues ID cards and reports, and often coordinates stop-loss filings |
| Provider network | Gives access to discounted rates with doctors and hospitals. It may be rented through the TPA or come from a carrier |
| Pharmacy benefit manager (PBM) | Runs the drug benefit: formulary, pharmacy network, drug pricing and rebates |
| Stop-loss carrier | Insures the employer against large individual claims and high total claims |
| Underwriter or actuary | Sets expected claims, funding levels and stop-loss attachment points |
| Add-on programs | Optional programs such as care navigation, direct primary care, centers of excellence or condition management |
| ERISA counsel and compliance support | Drafts the plan document and SPD and helps with filings |
Insurance carriers also sell self-funded administration, called administrative services only (ASO). Under an ASO arrangement the carrier acts as the TPA and supplies its network, but the employer still pays the claims. Independent TPAs offer the same administrative role and can pair it with a rented network, reference-based pricing or direct contracts with providers.
What does the employer have to do?
A self-funded plan sponsor takes on legal duties a carrier would otherwise handle. Most private employers’ self-funded plans are governed by ERISA, and the employer, or a committee it names, is the plan’s fiduciary for the decisions it makes about the plan.
| Requirement | What it means for a self-funded plan |
|---|---|
| Written plan document | ERISA requires every plan to be established and maintained under a written instrument that names the plan’s fiduciaries. In a self-funded plan, the employer’s plan document defines what is covered, since there is no carrier certificate to rely on |
| Summary plan description (SPD) | A plain-language summary of the plan given to participants. See summary plan descriptions |
| Form 5500 | The annual return filed with the DOL, due the last day of the 7th month after the plan year ends, with a 2½ month extension available on Form 5558. See Form 5500 deadlines |
| PCORI fee | The plan sponsor pays it directly on IRS Form 720 by July 31 of the following year. For plan years ending on or after October 1, 2025 and before October 1, 2026, it is $3.84 per covered life |
| HIPAA privacy and security | The plan is a covered entity. The employer needs plan document language and internal safeguards before it handles employees’ health information for plan purposes, and the plan must give a notice of privacy practices |
| Section 105(h) nondiscrimination | A self-insured medical plan cannot favor highly compensated individuals in eligibility or benefits. If it does, the excess reimbursements to those individuals become taxable income to them |
| COBRA | Private employers with 20 or more employees on more than half their typical business days in the prior year must offer continuation coverage, and can charge up to 102% of the plan’s cost |
| ACA and other federal rules | The plan must meet the ACA’s coverage rules, such as the out-of-pocket limit and preventive care, plus mental health parity, ACA employer reporting, the yearly gag clause attestation and the prescription drug (RxDC) report |
A few points apply only to some plans. Welfare plans with fewer than 100 participants that pay benefits only from the employer’s general assets, insurance, or both are generally exempt from filing Form 5500. A self-funded plan that holds money in a trust has to file at any size. Governmental and church plans are generally outside ERISA and follow different rules, which ERISA vs. non-ERISA plans covers.
ERISA also generally keeps states from treating a private employer’s self-funded plan as an insurer. That is why state benefit mandates and state premium taxes on insured policies generally do not reach the plan, and why a multi-state employer can run one plan design across states.
What data does the plan own?
A self-funded plan owns its claims data. Every claim the TPA and PBM pay is a record of what the plan bought, from which provider, at what price. That is the raw material for managing cost.
With claims-level data, an employer can see:
- Where the money goes, by provider, facility, diagnosis and drug, including how much a few high-cost members drive total spend.
- What the plan actually paid, compared with billed charges and with Medicare rates for the same services.
- How vendors perform, such as the PBM’s real pricing against its contract guarantees, or the TPA’s accuracy on claims it paid.
- What stop-loss underwriters will see, so the employer goes into renewal knowing the same facts the carrier does.
The Consolidated Appropriations Act, 2021 backs this up. Contracts between group health plans and their TPAs, networks and other service providers cannot block the plan from getting its own de-identified claims data, and plans attest to that every year by December 31. The data still has to be handled under HIPAA, and the employer should get it from vendors under a business associate agreement.
Two Ethos Benefits clients show what this looks like in practice. Kalos Services, a 400-employee HVAC and trades company, moved from a fully insured plan to self-funding in 2022. Hendry Marine, a shipyard of about 300 employees, has been self-funded with reference-based pricing since 2017.
Which claims does stop-loss cover?
Stop-loss is what keeps a bad claims year from becoming a crisis, and the contract type decides which claims it actually covers. A contract is named by two numbers: the months in which a claim must be incurred, and the months in which it must be paid.
| Contract | What it covers | When it is used |
|---|---|---|
| 12/12 | Claims incurred and paid within the 12-month policy period | Often a mature plan staying with the same carrier |
| 12/15 | Claims incurred in the 12-month policy period and paid within 15 months, a 3-month run-out | When the employer wants protection for claims paid after the year ends |
| 15/12 | Claims incurred in the 3 months before the policy plus the 12-month period, and paid during the policy period | A short run-in, common in a plan’s first self-funded year |
| 24/12 | Claims incurred in the 12 months before the policy plus the 12-month period, and paid during the policy period, a 12-month run-in | Moving from one stop-loss carrier to another |
| Paid | Claims paid during the policy period, regardless of when they were incurred | Usually after the first year with a carrier |
A 24/12 contract is a run-in contract. It picks up claims that were incurred under the prior contract but are still being paid, so they are not stranded when the employer changes carriers. It does not reach back 24 months before the policy starts.
Two other terms decide how much protection a contract really gives:
- Lasering. The carrier sets a higher specific deductible for one person with known high costs, or excludes that person. The employer pays that member’s claims up to the lasered amount.
- Terminal liability. An option that adds run-out coverage if the plan ends or moves to fully insured coverage, so claims incurred before termination but paid afterward are still protected.
Specific stop-loss covers one person’s claims above a per-person deductible. Aggregate stop-loss covers the group’s total claims above an attachment point set from expected claims. Some states set minimums for both, based on the NAIC Stop Loss Insurance Model Act’s $20,000 floor for specific attachment points. For how attachment points, pricing and contract gaps work in detail, see how stop-loss insurance works, and for aggregate coverage specifically, aggregate stop-loss. Ethos reviews, places and audits stop-loss contracts through its stop-loss service.
Who does self-funding fit?
Self-funding fits an employer that can absorb swings in monthly claims cost, wants control over plan design and vendors, and will use its own data. Group size matters less than it used to, but financial capacity and appetite for active management still decide whether it works.
| Self-funding tends to fit | Self-funding tends not to fit |
|---|---|
| Cash reserves or credit to cover a high-claims month, and the stop-loss deductible on several large claimants in one year | Little cash cushion, or a need for the same health cost every month |
| A workforce large and stable enough that claims are reasonably predictable | A very small or fast-changing group, where one or two large claims swing the whole year |
| Leadership willing to review claims data, vendor contracts and renewals each year | No one with the time or support to manage vendors and compliance |
| Employees in several states, where one plan design is easier than several insured plans | An expected sale, merger or major workforce change in the near term |
| A long-term view, judging results over several years | A goal of cutting cost in the first year, with no tolerance for a bad one |
Employers that are not ready to self-fund fully have other options. Level-funded plans put a small self-funded layer under a fixed monthly payment, and they are common among smaller groups: KFF’s 2025 survey put 37% of covered workers at firms with 10 to 199 workers in level-funded plans. Some mid-sized employers join a stop-loss captive or a self-funded healthcare trust to share part of the risk with other employers.
Self-funding has real risks: uneven cash flow, the chance of several large claims in one year, lasers at renewal, run-out claims if the plan ends, and more legal work for the employer. It also has real advantages, from lower fixed costs to control over vendors and data. For an honest weighing of both, see self-funded health insurance pros and cons.
