A level funded health plan lets a small employer pay one fixed amount each month, like a traditional fully insured plan, while that money actually funds the group’s claims and the employer may get part of any unused claim dollars back at the end of the year. It sits between fully insured coverage, where the carrier takes on all the risk, and self-funding, where the employer does. Stop-loss insurance sits behind the arrangement to cap the employer’s exposure when claims run high.
That structure can lower costs for a healthy group, but it also brings trade-offs that fully insured plans don’t have. This guide explains how level funded plans work, who they tend to fit, and the contract terms to check before you sign.
How Level Funded Health Plans Work
According to the Society for Human Resource Management, the employer pays the carrier a single fixed amount each month that covers three things:
- Expected claims. The money set aside to pay employees’ medical and pharmacy claims.
- Stop-loss premium. The cost of insurance that limits what the employer owes above a set amount.
- Administration. The cost of running the plan, such as claims processing and reporting.
At the end of the plan year, the claims are compared with what was expected. If claims came in lower, the employer may receive a refund of part of the unused funds. If claims ran higher, stop-loss coverage limits the employer’s exposure, and the stop-loss premium typically rises at renewal.
Stop-loss can protect against a single very large claim, known as a specific limit, or against the group’s total claims climbing past a set level, known as an aggregate limit. Which protections you get, and at what dollar thresholds, are some of the most important terms in the contract.
Level Funded vs. Fully Insured vs. Self-Funded
| Fully insured | Level funded | Self-funded | |
|---|---|---|---|
| Who pays claims | The insurance carrier | Employer funds claims through a fixed monthly payment, with stop-loss behind it | The employer pays claims directly |
| Monthly cost | Fixed premium | Fixed payment | Varies with actual claims |
| If claims are low | No refund of unused funds | Possible refund, depending on contract terms | Employer keeps the savings |
| If claims are high | Carrier absorbs the cost; premium changes at renewal | Stop-loss limits exposure; renewal cost may rise | Employer pays unless it has stop-loss coverage |
| Typical fit | Employers wanting no claims risk | Smaller employers moving away from fully insured | Employers with the resources to manage risk |
Potential Advantages
- Predictable billing. You pay the same amount every month, so budgeting is closer to a fully insured plan than to self-funding.
- A chance at a refund. If your group’s claims run below expectations, you may get some of the unused money back.
- Better claims data. SHRM notes level funded plans typically give employers more detailed claims reporting, which can inform decisions about pharmacy benefit management or case management.
Risks and Trade-Offs to Weigh
- Renewal can jump after a bad claims year. Stop-loss renewal pricing reflects your group’s claims experience and the age and health of your workforce. SHRM describes an employer that returned to a fully insured plan after high claims made its renewal too expensive.
- Refunds aren’t guaranteed. Terms vary. Some administrators keep a share of excess funds, some contracts roll unused dollars into later years, and some tie the refund to renewing with the same carrier.
- Minimum premium language. Some stop-loss contracts can require you to keep paying premium on a set number of employees even after layoffs shrink the covered group.
- Cash-flow impact. Level funding is a financial arrangement, not just a benefits choice, so it’s worth involving whoever manages your finances.
- Different rules. Because level funded plans are built on a self-funded structure, some state benefit and rating rules that apply to fully insured plans can work differently. Rules vary by state, so ask your broker how they apply to you.
Contract Terms to Check Before You Sign
SHRM’s guidance highlights a few terms worth negotiating or at least understanding:
- Avoid minimum premium language where you can.
- Look for a 12/18 clause, which pays claims incurred during the 12-month contract term but reported within 18 months.
- Make sure you aren’t required to renew in order to receive a refund.
- Compare more than one carrier instead of defaulting to your current one, since some prepackaged offerings are not negotiable.
Who Level Funded Plans Tend to Fit
Level funded plans are aimed at smaller employers that want to move away from fully insured coverage but aren’t ready to self-fund. SHRM cites the Kaiser Family Foundation’s 2020 Employer Health Benefits Survey, which found 16% of firms with 3 to 199 employees using level funded plans. That’s an older figure, but it shows the model is established among small employers.
They tend to suit employers who have a relatively healthy group, can handle some variation in renewal cost, and want visibility into claims. They may be less attractive if your group includes known high-cost claimants, if you want a premium that never depends on your own claims history, or if you’d rather give each employee a set allowance to buy their own coverage. In that case, compare level funding with an ICHRA. Our guides on ICHRA vs. group health insurance and how ICHRA works for small business explain that option.
Questions to Ask Your Broker
- What are the specific and aggregate stop-loss limits, and what happens to them at renewal?
- How is any refund calculated, when is it paid, and does the carrier keep a portion?
- Does the contract include minimum premium language or a 12/18 run-out clause?
- How is my group underwritten, and what happens if employees’ health changes mid-year?
- How will I see claims data, and how often?
- How do my state’s benefit and rating rules apply to this plan?
Where the Monthly Payment Goes
A level funded plan bundles several pieces into one fixed monthly payment. The exact split varies by carrier, but the components are consistent:
| Component | What it does | What happens to it |
|---|---|---|
| Claims fund | Money set aside to pay your employees’ medical and prescription claims | Depending on the contract, unused funds may be refunded or credited at year end |
| Stop-loss premium | Insurance that reimburses claims above the attachment points | Paid to the stop-loss carrier and not refundable |
| Administrative fees | Claims processing, network access and member service | Paid to the administrator |
Stop-Loss Attachment Points
Two thresholds define how much risk stays with the employer. The specific attachment point is the amount of claims for any one person above which the stop-loss policy pays. The aggregate attachment point is the total claims for the whole group in a plan year above which the policy pays. For illustration, one regulatory summary cites a $25,000 specific and $1 million aggregate point for a larger group, and the right levels for a small group depend on its size and health profile.
A lower specific attachment point reduces your exposure to a single large claim but raises the stop-loss premium. Ask for both attachment points in writing and confirm whether any individual has been excluded from stop-loss coverage.
Regulation and Underwriting
A level funded plan is a self-funded plan under ERISA. That means it is generally exempt from most state insurance laws, including state-mandated benefits, and from the ACA’s essential health benefit requirements. The employer still carries federal duties, including fiduciary responsibility and reporting. The stop-loss policy is regulated as insurance, and some states, including New York, Delaware and California, restrict or set rules for stop-loss coverage sold to small employers, so check the rules in your state.
Level funded carriers also typically underwrite on health. They review a group’s health information or claims history, so a group with high expected claims can be declined or priced higher. Fully insured small group plans under the ACA are not underwritten that way, which is one reason healthier groups often see lower level funded quotes, and groups with higher claims often do not.
What Happens at Year End
- Claims come in below the claims fund: the contract may return part of the unused money as a refund or credit. Ask what share you receive.
- Claims land about where expected: there is usually nothing to reconcile, and your costs match the fixed payments.
- Claims run high: stop-loss coverage responds above the attachment points, according to the contract terms.
- At renewal: the next year’s rate reflects your group’s claims experience, and your options can change if claims were heavy.
If the possibility of a swing in renewal pricing is the main concern, compare level funding with a fixed-allowance approach. Our guide to ICHRA for small business explains how an ICHRA sets your cost up front.
Compare Group Health Options With a Licensed Broker
The right funding model depends on your group’s size, health profile and appetite for cost variability. Our licensed brokers can compare fully insured, level funded and ICHRA options for your business at no cost to you.
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Plan availability, pricing and rules vary by state, group size and carrier. This article is general information and is not tax, legal or financial advice.
Frequently Asked Questions
What is a level funded health plan?
A group health plan where the employer pays a fixed monthly amount that covers expected claims, stop-loss insurance and administration, with the possibility of a refund if claims come in lower than expected.
How is level funding different from self-funding?
With self-funding the employer pays claims directly, so costs vary month to month. Level funding packages a fixed monthly payment with stop-loss coverage to make costs more predictable.
Do you get money back with a level funded plan?
Possibly. If claims run below expectations the employer may receive a refund, but terms differ. Some administrators keep a share, some contracts roll unused funds forward, and some tie refunds to renewal. Review the contract.
What is stop-loss insurance?
Coverage that caps the employer’s exposure to claims above a set amount, either per employee or for the group as a whole.
Can level funded renewal rates go up?
Yes. Stop-loss renewal pricing reflects your claims experience and the age and health of your workforce, so a heavy claims year can raise next year’s cost.
Are level funded plans regulated by the state?
Level funded plans are self-funded ERISA plans, so they are generally exempt from most state insurance laws such as mandated benefits. The stop-loss policy is regulated as insurance, and some states restrict it for small employers. Employers still have federal fiduciary and reporting duties.
Do level funded plans use medical underwriting?
Typically yes. Carriers review your group health information or claims history, so a group with high expected claims may be declined or priced higher. Fully insured small group plans under the ACA are not underwritten this way.
What happens if one employee has a very large claim?
Specific stop-loss coverage reimburses an individual claim above the specific attachment point, which limits your exposure to that threshold subject to the contract. Confirm the attachment point and any individual exclusions before you sign.
