Beyond Fully Insured: Is Level Funding or Self-Funding Right for Your Business?

By: Trip Wagner
Employee Benefits Consultant
Spartan Wealth Management

For many employers, health insurance renewal has become an annual exercise in managing increases.

The carrier delivers the renewal. The employer reviews the numbers, considers adjustments to deductibles or employee contributions, shops the market and ultimately makes a decision about how much additional cost the business and its employees can absorb.

But there is another question employers may want to ask: Is the way we fund our health plan still the right fit for our business?

For some organizations, moving away from a traditional fully insured arrangement can provide greater visibility into health care spending, more flexibility in plan design and opportunities to manage costs differently. It also means accepting responsibilities and risks that a fully insured employer largely transfers to an insurance carrier.

That is where self-funded and level-funded health plans enter the conversation.

Neither is inherently better than traditional insurance. The question is whether the funding arrangement aligns with the employer’s workforce, financial position, cash flow, risk tolerance and long-term benefits strategy.

Three Ways to Think About Funding Employee Health Benefits: Fully Insured, Level Funding, and Self-Funding

Most employers are familiar with the fully insured model. The employer pays a predetermined premium to an insurance carrier, and the carrier assumes the financial responsibility for covered medical claims.

A self-funded plan works differently. Rather than purchasing insurance to cover the plan’s claims, the employer assumes direct financial responsibility for paying them. Employers commonly engage a third-party administrator, or TPA, to handle functions such as claims processing and member services. They may also purchase stop-loss insurance to limit exposure to unexpectedly large claims.

A level-funded plan occupies a space between these approaches. It is a form of self-funding designed to provide more predictable monthly costs. The employer generally makes a fixed monthly payment consisting of estimated claims costs, administrative expenses and stop-loss coverage.

The result is an arrangement that can provide some of the characteristics of self-funding without requiring the employer to absorb the same degree of month-to-month claims volatility.

That distinction has become increasingly relevant to smaller employers. According to KFF’s 2025 Employer Health Benefits Survey, 37% of covered workers at firms with 10 to 199 employees were enrolled in level-funded plans.

Why Employers Consider Self-Funding

The fundamental appeal of self-funding is control.

Under a fully insured arrangement, an employer pays the carrier’s established premium regardless of the group’s actual claims experience during the year. With self-funding, the employer assumes responsibility for claims, creating a more direct relationship between the plan’s health care utilization and its cost.

That can create several strategic opportunities.

Greater visibility into health care spending

Claims information can help an employer understand what is driving plan costs.

That matters because managing benefits becomes significantly more difficult when the employer knows how much the plan costs but has limited insight into why.

Self-funded arrangements can provide greater transparency into health care spending, allowing employers and their advisors to identify cost drivers and evaluate targeted cost-management strategies.

That information can turn benefits planning from a largely annual purchasing exercise into an ongoing management process.

Greater flexibility in plan design

Self-funded employers may also have greater flexibility to design benefits around the needs of their workforce and select vendors and administrative partners accordingly.

For an employer with a clearly defined benefits philosophy, that flexibility can be valuable. Rather than simply selecting among carrier offerings, the organization can evaluate which components of the plan support its recruiting, retention and financial objectives.

The possibility of retaining favorable claims experience

In a traditional fully insured arrangement, a favorable claims year does not generally mean the employer receives unused premium dollars back.

Self-funding changes that relationship because the employer is funding actual claims.

With certain level-funded arrangements, for example, claims funding that exceeds actual claims may result in a surplus refund at the end of the contract period, depending on the terms of the arrangement.

That qualification is important. Refund provisions, reconciliation methods and contractual terms vary, so employers should understand precisely what happens to a surplus before choosing a plan.

What Happens When Claims Are Higher Than Expected?

This is understandably one of the first questions employers ask about self-funding.

If an employee experiences a serious illness or injury, could one large claim significantly affect the business?

That possibility is one reason stop-loss insurance is an important part of many self-funded strategies.

Specific stop-loss coverage can limit exposure associated with a particularly high-cost individual claimant, while aggregate stop-loss can provide protection when total plan claims exceed an established threshold.

Stop-loss does not transform a self-funded plan into a fully insured plan. The employer still retains financial responsibility within the parameters established by the arrangement.

Instead, it establishes boundaries around some of the risk the employer has chosen to assume.

The U.S. Department of Labor similarly notes that employers, particularly smaller employers, may use stop-loss coverage to help reduce the potential financial impact of large fluctuations in claims.

Where Level Funding Changes the Equation

For an employer interested in the potential advantages of self-funding but uncomfortable with unpredictable monthly claims expenses, level funding can offer another path.

Instead of paying claims as they occur and experiencing potentially significant monthly fluctuations, the employer makes a consistent payment based on projected claims, administrative expenses and stop-loss protection.

Think of it as adding a degree of budget predictability to a self-funded structure.

If actual claims are favorable, the employer may be eligible for a portion of the claims surplus, depending on the contract. If claims exceed expectations, stop-loss coverage may limit the employer’s additional liability based on the terms of the plan.KFF describes level-funded arrangements as self-funded options packaged with stop-loss coverage that substantially reduces the amount of risk retained by the employer.

For a small or midsized business, that combination can make the conversation about alternative funding much more practical.

The Tradeoff: More Control Requires More Due Diligence

There are meaningful potential advantages to alternative funding, but employers should resist viewing self-funding simply as a way to “save money.”

Savings are not guaranteed.

Claims can be volatile. Administrative expenses matter. Stop-loss coverage has a cost. Contract provisions can significantly affect the economics of an arrangement. The size and demographics of the covered population can also influence whether a particular structure makes sense.

Your research identifies administrative fees and contractual differences as two issues employers should evaluate carefully when considering level funding.

There are regulatory considerations as well.

Self-funded private employer plans generally fall under ERISA and are exempt from many state insurance requirements, but they remain subject to applicable federal health plan requirements. The research you provided specifically notes that self-funded plans remain subject to federal requirements including ERISA, the Affordable Care Act and HIPAA.

Employers should therefore involve appropriate benefits, legal and tax professionals when evaluating the structure and compliance obligations of a plan.

Five Questions to Ask Before Changing Your Funding Strategy

The decision should begin with the business rather than the insurance product.

1. How much financial volatility can the organization comfortably absorb?

An employer considering self-funding should understand both expected claims and adverse scenarios. Cash flow, reserves and overall financial capacity matter.

2. How valuable would better claims information be?

For an employer prepared to actively manage its benefits program, additional claims visibility may help identify utilization patterns and cost drivers. The research you provided specifically notes that level-funded plans may offer reporting that helps employers better understand utilization trends.

3. Does the organization want greater flexibility in plan design?

If benefits are an important component of the organization’s talent strategy, additional flexibility may be valuable. If the organization prefers simplicity and minimal involvement, the tradeoff may be less attractive.

4. What exactly does the stop-loss contract protect?

Employers should understand attachment points, exclusions, reimbursement provisions and the distinction between specific and aggregate protection. “We have stop-loss coverage” is not enough information to evaluate the risk.

5. How does the arrangement perform under multiple scenarios?

Do not compare funding options using only the most favorable projection. Model a good claims year. Model an expected year. Model a difficult year. Then evaluate the financial outcome and cash-flow implications of each.

The Goal Isn’t Simply to Buy Insurance Differently

Health benefits are one of the most significant investments many employers make in their people.

That deserves a broader conversation than simply asking which carrier offered the lowest renewal.

A fully insured plan may continue to be the appropriate choice for an organization that prioritizes predictability and risk transfer. Level funding may appeal to an employer seeking greater visibility and flexibility while maintaining relatively predictable monthly expenses. Traditional self-funding may make sense for organizations with the financial capacity and desire to assume greater responsibility for managing their health plan.

The appropriate strategy is the one that aligns the funding model with the business behind it.

At Spartan Wealth Management, we help employers evaluate benefits decisions in the context of their workforce, financial objectives and broader business strategy. If you’re approaching renewal or simply wondering whether your current funding arrangement still makes sense, a funding analysis can help you understand the options before making a change.

Please complete the form below to download our complimentary companion guide the Employer Health Plan Funding Decision Guide | 7 Questions to Ask Before Choosing Fully Insured, Level Funded, or Self-Funded. 

For more insight into the considerations for selecting your employee health benefits, click HERE to view our recent blog on the questions benefits decision-makers need to consider.

For information on your responsibilities as an employer in providing benefits under ERISA, click HERE to visit the U.S. Department of Labor’s website dedicated to compliance assistance.