Every employer health plan has to be paid for somehow. The funding model decides who carries the risk of a bad claims year, how money moves each month, how much data you see, and which laws and filings apply to your plan. There are three main models, fully insured, level funded and self-funded, and a fourth choice, reference-based pricing, that changes how a self-funded plan pays providers.
According to the KFF 2025 Employer Health Benefits Survey, 67 percent of covered workers are in self-funded plans, including 27 percent at firms with 10 to 199 workers and 80 percent at larger firms. KFF also reports that 37 percent of covered workers at firms with 10 to 199 workers are in level-funded plans.
The four models side by side.
The biggest difference is who pays when claims run high. Everything else in the table follows from that.
| Fully insured | Level funded | Self-funded with stop-loss | Reference-based pricing | |
|---|---|---|---|---|
| Who carries the risk | The insurance company | The employer, with low stop-loss deductibles so most risk passes to the stop-loss carrier | The employer, up to the stop-loss deductibles | The employer, plus added risk of provider disputes and balance bills |
| Cash flow | Fixed monthly premium | Fixed monthly payment covering administration, a claims fund and stop-loss | Fixed administration and stop-loss costs, plus claims as they are paid, which vary month to month | Same as self-funded, with claims priced to a benchmark |
| Unspent claims money | Kept by the insurer | Part may be refunded or credited, depending on the contract | Stays with the employer | Stays with the employer |
| Data access | Often limited or summarized, more for larger groups | Usually claims reports from the TPA or carrier | Detailed claims data through the TPA | Detailed claims and repricing data |
| State benefit mandates | Apply, because the policy is state-regulated insurance | Generally preempted by ERISA for the plan itself | Generally preempted by ERISA for the plan itself | Generally preempted by ERISA for the plan itself |
| Stop-loss | Not needed | Built in | Bought separately, specific and aggregate | Needed, and the carrier must accept the pricing approach |
| PCORI fee (Form 720) | Paid by the insurer | Paid by the employer | Paid by the employer | Paid by the employer |
| Form 5500 | Required for plans with 100 or more participants at the start of the plan year | Same 100-participant rule, unless funded through a trust | Same 100-participant rule, unless funded through a trust | Same 100-participant rule, unless funded through a trust |
| MLR rebates | Possible if the insurer misses the 80 or 85 percent standard | No | No | No |
| Biggest risk | Premium increases you cannot see behind | Higher rates or a decline at renewal, and terminal liability if you leave | A large claim or bad year hitting cash flow before reimbursement | Balance billing and provider pushback |
Each model has its own detailed page: level funded vs. fully insured, level funded vs. self-funded, self-funded health insurance, stop-loss insurance and reference-based pricing.
What is a fully insured plan?
In a fully insured plan, the employer buys a group health insurance policy and pays a fixed premium per employee each month. The insurance company pays the claims and keeps the risk. If claims come in higher than expected, the insurer absorbs the loss for that year. If they come in lower, the insurer keeps the difference, subject to the medical loss ratio rules.
What fully insured means in practice:
- Predictable cost for the year. The premium is set at renewal and does not change with claims until the next renewal.
- State insurance law applies. The policy must include the benefits the issuing state mandates, and the insurer pays state premium taxes, which are built into your rate.
- MLR rebates. Under the ACA, insurers must spend at least 80 percent of small group premium and 85 percent of large group premium on medical care and quality improvement, or pay rebates to the policyholder, usually the employer.
- Less data. Smaller groups often get little claims detail. Larger groups may get more, but the data belongs to the insurer’s system and its reporting.
- The employer still has ERISA duties. A private employer’s insured plan is still an ERISA plan. It needs a summary plan description and, at 100 or more participants, a Form 5500.
Fully insured coverage suits employers who want a fixed cost and cannot absorb a bad claims year. The tradeoff is that you pay the insurer’s margin and risk charge every year, and a high-claims year still shows up at renewal.
What is a self-funded plan?
In a self-funded (self-insured) plan, the employer pays employees’ medical claims from its own funds instead of paying premiums to an insurer for that risk. Most self-funded employers hire a third-party administrator (TPA) to process claims, rent a provider network and handle member service, and buy stop-loss insurance to cap large losses.
What self-funding means in practice:
- You carry the claims risk. Costs track your own group’s claims. A good year leaves money with the employer, and a bad year costs more.
- Stop-loss limits the downside. Specific stop-loss reimburses claims for one person above a per-person deductible. Aggregate stop-loss reimburses total claims above a group-wide cap. Contract terms such as 12/12, 12/15 or 24/12, lasering and terminal liability decide which claims are reimbursed. See how stop-loss insurance works.
- ERISA preempts state insurance mandates. ERISA’s preemption clause and its “deemer” clause keep states from regulating a private self-funded plan as if it were an insurance company. The plan still has to follow federal rules, including ERISA, HIPAA, COBRA, the ACA and mental health parity. The stop-loss policy is still state-regulated insurance.
- You own the data. Your TPA holds detailed claims data for your plan, and federal law bars contract terms that keep a plan from getting its own de-identified claims data.
- More filings fall on you. The employer pays the PCORI fee and takes on the plan sponsor’s fiduciary duties for how claims are paid and how plan assets are handled.
- Nondiscrimination testing. Self-insured medical reimbursement plans are subject to the Internal Revenue Code section 105(h) rules against favoring highly compensated employees.
Self-funding fits employers with steady cash reserves and enough employees for claims to be somewhat predictable. Kalos Services, a 400-employee contractor, moved from fully insured to self-funded; read the Kalos Services case study. For the full list of tradeoffs, see self-funded health insurance pros and cons.
Where does level funding fit?
A level-funded plan is a self-funded plan packaged to feel like an insured one. The employer pays the same amount each month, which covers TPA administration, a claims fund and stop-loss insurance with low deductibles. If claims exceed the fund, stop-loss pays the excess and the monthly cost does not change during the year.
Level funding is not a halfway point legally. Most level-funded plans are self-funded plans, so they generally escape state mandates and the employer pays the PCORI fee. The points to check before signing:
- Surplus terms. Whether you get any unused claims fund back, how much, and when, depends entirely on the contract. Some refunds are conditioned on renewing.
- Renewal. A group with high claims can see a large increase or be declined at renewal.
- Terminal liability. Claims incurred before the plan ends but paid afterward need run-out coverage. Without it, the employer pays them.
For the details, see level funded vs. fully insured and level funded vs. self-funded.
Where does reference-based pricing fit?
Reference-based pricing (RBP) changes how a self-funded plan pays providers, not who carries the risk. Instead of paying a network’s negotiated rates, the plan pays a set amount tied to a benchmark, often a multiple of what Medicare pays for the same service.
The risk employers need to understand is balance billing. A provider with no contract with the plan may bill the employee for the difference between its charge and what the plan paid. Federal surprise billing law protects patients for emergency care and for certain care from out-of-network providers at in-network facilities, but it does not cover every RBP situation. Plans that use RBP usually need a member advocacy process, a stop-loss carrier that accepts the pricing approach, and clear communication to employees.
Hendry Marine Industries, about 300 employees, has been self-funded with reference-based pricing since 2017; see the Hendry Marine case study and the reference-based pricing explainer.
How does ERISA preemption change the rules?
Fully insured plans follow state insurance law. Self-funded plans, including level-funded plans, generally do not. That is the most important legal difference between the models.
ERISA section 514 preempts state laws that “relate to” an employee benefit plan, while saving state laws that regulate insurance. The deemer clause adds that a state cannot treat an employee benefit plan as an insurance company. The result:
- Fully insured: The state regulates the insurance policy, so state benefit mandates, rating rules and premium taxes reach your coverage indirectly.
- Self-funded and level funded: The state cannot regulate the plan as insurance, so a plan sponsor can offer one plan design across several states.
- Stop-loss: States regulate stop-loss policies as insurance. Some states set minimum attachment points based on the NAIC Stop Loss Insurance Model Act, which recommends a specific attachment point of no less than $20,000. The Department of Labor has noted that states can regulate stop-loss in ways that affect small employers’ ability to self-fund.
Non-federal governmental and church plans follow different rules. See ERISA vs. non-ERISA plans.
Which filings and fees apply to each model?
The funding model changes who files what. These are the main federal items.
| Filing or fee | Fully insured | Self-funded and level funded |
|---|---|---|
| PCORI fee (Form 720) | Paid by the insurer | Paid by the employer, by July 31 of the year after the plan year ends. For plan years ending October 1, 2025 to September 30, 2026, the fee is $3.84 per covered life |
| Form 5500 | Required at 100 or more participants at the start of the plan year | Required at 100 or more participants. Plans under 100 are generally exempt if benefits are paid from the employer’s general assets, insurance, or both, but not if funded through a trust |
| MLR rebates | Received from the insurer when it misses the 80 or 85 percent standard | Not applicable |
| Summary plan description | Required for ERISA plans | Required for ERISA plans |
| Gag clause attestation | Required, often filed by the insurer | Required, often filed by the TPA under a written agreement |
Form 5500 deadlines and extensions are on the Form 5500 deadline page.
What other ways are there to fund a plan?
Two other structures come up in plan financing conversations. Both are versions of self-funding.
- Stop-loss captives. A group of employers pools part of their stop-loss risk in a captive insurer. See stop-loss captives.
- Self-funded healthcare trusts. Some employers fund claims through a trust, which changes Form 5500 and fiduciary obligations. See self-funded healthcare trusts.
How do you choose between them?
The right model depends on cash reserves, group size, claims stability, appetite for administration and how much you want to see in your data. Questions to work through at renewal:
- Can the company absorb a bad month? Self-funded claims arrive unevenly. Stop-loss reimbursement comes after claims are paid, unless the contract offers advance funding.
- How stable are claims? Smaller groups swing more from year to year, which is why many start with level funding.
- Are there known large claims? Expect stop-loss carriers to laser them or price for them.
- Who will run the plan? Self-funding means choosing a TPA, a network, a pharmacy benefit manager and a stop-loss carrier, and overseeing them as a fiduciary.
- What happens if you leave? Check run-out and terminal liability before you start, not when you switch back.
Compare the options on the same basis, including stop-loss contract terms, and model a high-claims year, not just the expected one. Ethos Benefits reviews stop-loss quotes and contracts through its stop-loss service.
