Self-funding is the most common way American workers get employer coverage. According to 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. That gap by firm size says a lot about who the model suits. Here is a balanced look at what an employer gains and what it takes on. For the mechanics, see how self-funded health insurance works.
Pros and cons at a glance.
Self-funding trades a fixed premium for direct responsibility for claims. The table puts each advantage next to the cost that comes with it.
| Pros | Cons |
|---|---|
| Keep the surplus when claims run lower than expected | Pay the full cost of a bad year, up to your stop-loss limits |
| Pay claims as they happen instead of a fixed premium in advance | Claims arrive unevenly, so cash flow swings month to month |
| Full access to your own claims data | You need people who can read the data and act on it |
| Design benefits around your workforce | You own the plan document and every design decision |
| ERISA preempts state insurance mandates and premium taxes | Federal compliance duties sit with you as plan sponsor |
| Choose your own networks, pharmacy benefit and cost tools | More vendors to select, contract and oversee |
| Stop-loss caps catastrophic claims | Stop-loss can laser high-cost members and reprice at renewal |
| Plan year costs reflect your own population | Claims incurred before you leave are still owed after you leave |
What are the pros of self-funding?
The main advantages are savings in a good year, cash flow that follows claims, full claims data, plan design control and freedom from state insurance law.
You keep the money when claims run low
In a fully insured plan, the premium is set in advance and the carrier keeps any surplus. In a self-funded plan, the employer pays actual claims plus fixed costs (administration and stop-loss), so a low-claims year stays with the plan. Savings depend on your claims, your vendors and how actively the plan is managed. Any claimed savings percentage should come from your own modeling, not a rule of thumb.
Cash flow follows claims
You fund claims as they are paid instead of paying a full premium up front. Money that would sit in a carrier’s reserves stays with the plan until it is needed. Employee contributions are plan assets, though, so they have to be handled and used for the plan under ERISA’s rules.
Full claims data
Self-funded plans can get detailed claims data from their TPA and other vendors. That shows where money goes: which conditions, which providers, which drugs. The data is protected health information, so access has to follow HIPAA, and employers usually see it de-identified or through a business associate. Claims analytics is how that data turns into decisions about plan design and vendors.
Plan design control
The employer writes the plan. You decide deductibles, copays, covered services, exclusions, eligibility and wellness programs, within federal rules. You can also add tools a fully insured plan may not allow, such as reference-based pricing, direct contracts with health systems, centers of excellence or a separately contracted pharmacy benefit manager.
Freedom from state insurance law
Under ERISA’s “deemer clause” (29 U.S.C. § 1144(b)(2)(B)), a self-funded ERISA plan is not treated as an insurance company for purposes of state insurance law. In practice, that means state benefit mandates and state premium taxes generally don’t apply to the plan. Multi-state employers also get one set of rules instead of many. Stop-loss insurance is still regulated by the states, and some state laws, such as certain PBM rules, can still reach self-funded plans.
Real examples
Two published Ethos Benefits case studies show self-funded plans in practice. Kalos Services, a 400-employee trades company, moved from fully insured to self-funded. Hendry Marine, a 300-employee shipyard, has been self-funded with reference-based pricing since 2017. In both, results came from active plan management on top of the funding model, not from the funding model alone.
What are the cons of self-funding?
The main drawbacks are claims volatility, uneven cash flow, exposure to large claims and lasers, fiduciary duties and liability for run-out claims.
Claims volatility
A self-funded plan’s cost is whatever its members’ care costs that year. A few premature births, cancer diagnoses or transplants can turn an average year into an expensive one. Smaller groups feel this most, because there are fewer people to spread the cost across, so the share of the bill that is predictable is smaller.
Uneven cash flow
Claims don’t arrive in equal monthly amounts. A large hospital claim can land in a single month, and stop-loss reimbursement comes after the plan has paid. The employer needs reserves to cover the gap. Many stop-loss carriers offer advance funding for very large claims, but that is a contract term to negotiate, not a given.
Large claimants and lasering
Stop-loss limits the damage but does not remove it. The plan pays every claim up to the specific deductible, and at renewal the carrier can raise rates or “laser” a member with known high costs. A laser sets a higher deductible for that one person, or excludes them, so the plan carries more of their claims. Some employers negotiate a renewal rate cap or a “no new laser” provision before binding the policy. See stop-loss insurance for attachment points and contract types.
Administrative and fiduciary duties
The employer, or a committee it names, is the plan fiduciary. Under ERISA, fiduciaries must act solely in the interest of participants, act prudently, follow the plan documents and avoid conflicts of interest. A fiduciary who breaches those duties can be personally liable to restore plan losses. In practice the duties include:
- A written plan document and a summary plan description
- Claims and appeals procedures that meet federal standards
- Form 5500 filings for plans that must file
- The PCORI fee on Form 720 by July 31 ($3.84 per covered life for plan years ending October 1, 2025 through September 30, 2026)
- HIPAA privacy and security, mental health parity and the ACA rules that apply to self-funded plans
- Selecting and monitoring the TPA, PBM, stop-loss carrier and other vendors
A TPA handles day-to-day claims processing, but hiring one does not move the fiduciary duty off the employer.
Terminal liability
Claims are paid weeks or months after care. If you stop self-funding, the plan still owes claims incurred before the end date that are paid afterward, known as run-out. Without a terminal liability option on the stop-loss contract, those late claims may not count toward your stop-loss limits. Budget for run-out before you switch funding models or stop-loss carriers.
Smaller groups carry more risk
The smaller the group, the more one claim moves the result and the harder it is to price stop-loss well. Some states also set minimum stop-loss attachment points for small groups. NAIC Model Act #92, which states may adopt or change, sets a $20,000 specific floor and higher aggregate floors for groups of 50 or fewer. That is part of why many smaller groups start with level funding as a step toward traditional self-funding: KFF’s 2025 survey found 37% of covered workers at firms with 10 to 199 workers were in level-funded plans.
Who does self-funding tend to fit?
Self-funding fits best when the employer can absorb a bad year and has the people or advisors to run the plan. The factors below are general signals, not hard cutoffs.
| Factor | Leans fully insured | Leans level-funded | Leans self-funded |
|---|---|---|---|
| Reserves and cash flow | Tight, needs a fixed monthly cost | Steady, prefers a fixed monthly cost | Strong reserves, can carry claim swings |
| Group size | Small, with little spread of risk | Small to mid-sized | Larger, with more predictable claims |
| Risk tolerance | Low | Moderate | Comfortable with year-to-year variance |
| Internal capacity | Limited benefits staff | Some benefits staff | Staff or advisors to oversee vendors and data |
| Claims history | None available | Limited | Several years of credible data |
How should you weigh the decision?
Model it before you commit. A fair comparison puts a fully insured renewal next to a self-funded projection that includes expected claims, a high-claims scenario, TPA and network fees, stop-loss premiums, lasers and run-out.
- Gather data. Collect current premiums, census data and any claims history your carrier will release.
- Get real quotes. Price TPA administration and stop-loss on the same contract basis (for example, 12/12 vs. 12/15) so the numbers compare.
- Stress-test the worst case. Add up the maximum the plan could owe in a bad year: aggregate attachment point, lasered amounts and fixed costs.
- Check your reserves. Make sure you can fund claims between payment and stop-loss reimbursement.
- Plan the exit. Know what run-out you would owe if you returned to fully insured coverage.
- Consider the middle ground. Level funding gives some self-funding features with a fixed monthly payment. Compare self-funded vs. fully insured side by side.
If you already self-fund, Ethos can review the market for your stop-loss contract through its stop-loss service.
Self-funding is not right or wrong in general. It rewards employers who can carry the risk and manage the plan actively, and it can hurt those who choose it only for the chance of a surplus.