Choosing between a level-funded and a fully insured health plan comes down to who keeps the money when claims run low and who pays when they run high. In the level funded vs fully insured comparison, a fully insured carrier charges a flat premium, absorbs every claim, and keeps any surplus; a level-funded plan charges a flat monthly amount too, but splits it into a claims fund, administrative fees, and stop-loss insurance, with unused claims dollars potentially refunded to the employer at year-end. The right model depends on your group’s size, health profile, tolerance for claims volatility, and willingness to take on compliance work.
How the Money Moves Under Each Model
With a fully insured plan, the employer pays the same premium every month per enrolled employee and dependent, and the carrier takes on all financial risk for medical claims.1Healthinsurance.org. Fully-insured health plan The premium is locked for the contract year. Heavy use, light use, catastrophic claim, no claims at all: the number on your invoice doesn’t move. If claims exceed what the carrier collected, the carrier eats the loss. If claims come in low, the carrier keeps the difference.
Level-funded plans sit between fully insured coverage and true self-insurance. Your monthly payment is also flat, but it gets divided three ways:2UnitedHealthcare. 4 Ways Level Funded Health Plans Help Manage Costs for Plan Sponsors a claims fund that pays employee medical and pharmacy claims as they come in, administrative fees paid to the third-party administrator (TPA) that processes claims and runs the network, and stop-loss premiums that cover the employer if claims blow past the claims fund.
Stop-loss is what makes the model viable for employers who couldn’t otherwise survive a catastrophic claim. Individual (or “specific”) stop-loss activates when one person’s claims cross a set threshold. Aggregate stop-loss activates when the entire group’s claims cross a separate ceiling. The employer’s total out-of-pocket for the year is capped at the sum of the agreed monthly payments; the stop-loss carrier covers the overage.2UnitedHealthcare. 4 Ways Level Funded Health Plans Help Manage Costs for Plan Sponsors
Who Keeps the Money in a Healthy Year
This is the sharpest divergence between the two models. A fully insured carrier keeps every premium dollar whether your employees used coverage heavily or barely at all. You may get a smaller rate increase at renewal, but no cash comes back.
There is one partial backstop. Under the ACA’s medical loss ratio rule, carriers must spend at least 80 percent of small-group premium revenue (or 85 percent for large groups) on actual medical care and quality improvement, and must rebate the difference if they fall short.3Office of the Law Revision Counsel. 42 U.S. Code 300gg-18 – Bringing Down the Cost of Health Care Coverage by Restricting Certain Excessive Expenditures by Health Insurance Issuers These rebates do exist, but they’re a fraction of what a level-funded surplus can return.
Level-funded plans reconcile the claims fund after the plan year closes. If claims came in below the deposited amount, the surplus belongs at least partly to the employer. Some contracts return the full surplus; others let the TPA retain a portion, so the effective refund can range from roughly 50 to 100 percent of unused funds.4SHRM. Level-Funded Health Plans: A Steppingstone to Self-Funding Some contracts roll the surplus forward as a credit instead of cutting a check. The surplus-sharing language in your contract decides this, and it rewards reading before you sign.
How Your Group Gets Priced
Fully insured plans in the small-group market must use community rating under the ACA. Carriers can vary premiums based only on plan choice, geographic area, employee age (within a 3-to-1 band), and tobacco use.5U.S. Government Publishing Office. 42 U.S.C. 300gg – Fair Health Insurance Premiums A small business with an older or less healthy workforce pays the same rate structure as one with young, healthy employees in the same area and age band. Health conditions can’t drive the price.
Level-funded plans are technically self-insured, so they sit outside community rating. Carriers quoting level-funded products use medical underwriting instead, often collecting employee health questionnaires before pricing the plan. A relatively young and healthy workforce gets rewarded with significantly lower rates. A workforce with chronic conditions or older demographics can see level-funded quotes come in at or above a community-rated fully insured renewal. That’s the central gamble: level funding rewards healthy groups and strips away the protection community rating provides to higher-risk groups.
What It Costs Now, and What a Bad Year Costs Later
The level-funded cost advantage comes from two places. First, potential surplus refunds. Second, avoidance of state premium taxes and insurer risk and profit margins baked into fully insured premiums. One major carrier reports that sponsors pay an average of 19 percent less with its level-funded product than with its fully insured plans.2UnitedHealthcare. 4 Ways Level Funded Health Plans Help Manage Costs for Plan Sponsors That’s a marketing average from one insurer, not a guarantee, but the direction is consistent for groups that underwrite well.
Renewals are where the two models separate again. Fully insured renewals in the small-group market are driven by the carrier’s overall book of business in your rating area, with your specific claims experience playing a limited role. Bad years get smoothed across the carrier’s entire risk pool. Healthy groups effectively subsidize sicker ones, and sicker groups benefit from the pooling.
Level-funded renewals track your group’s actual claims history. Carriers review utilization data, analyze high-cost conditions, and reprice the stop-loss layer based on what actually happened. A healthy year can produce a flat or reduced renewal. A year with one or two major claims can push the renewal up sharply, because no broader pool is absorbing your experience. Over a multi-year horizon, level funding tends to favor employers who actively manage workforce health, and punishes groups with volatile or unpredictable costs.
What You’re Legally On the Hook For
Fully insured plans are regulated as insurance products by each state’s department of insurance, and the carrier handles solvency, rate filings, most reporting, and state benefit mandates. Your compliance footprint as the employer is narrow.
Level-funded plans are self-insured ERISA plans, which triggers a different and heavier set of obligations.
Fiduciary Duty
Under ERISA, anyone who exercises discretionary authority over a plan or its assets is a fiduciary, which generally includes the employer.6U.S. Department of Labor. Understanding Your Fiduciary Responsibilities Under a Group Health Plan Fiduciaries must act solely in participants’ interest, make decisions with the care of a prudent person in a similar role, and document the reasoning behind them.7Office of the Law Revision Counsel. 29 U.S.C. 1104 – Fiduciary Duties In practice, you’re responsible for how plan assets are held, for hiring a competent and fairly priced TPA, and for ensuring claims decisions follow the plan document. A TPA can assume fiduciary liability for specific functions, but the employer can’t fully outsource the duty to monitor those vendors. A fully insured carrier handles claims administration and bears the financial risk, so the employer’s fiduciary exposure stays limited.
ACA Reporting
Self-insured and level-funded employers that qualify as applicable large employers (generally 50 or more full-time equivalent employees) file Form 1095-C and transmittal Form 1094-C. Smaller level-funded employers that aren’t ALEs use Form 1095-B and Form 1094-B. Fully insured employers leave this reporting to the carrier.
PCORI Fee
Sponsors of self-insured health plans, including level-funded arrangements, pay the Patient-Centered Outcomes Research Institute fee. For plan years ending between October 1, 2025, and September 30, 2026, the fee is $3.84 per covered life.8IRS. Patient Centered Outcomes Research Trust Fund Fee – Questions and Answers The fee applies through plan years ending before October 1, 2029. On a fully insured plan, the carrier pays this fee, built into your premium.
Form 5500
Level-funded plans with 100 or more participants enrolled on the first day of the plan year must file Form 5500 with the Department of Labor. Smaller level-funded plans are generally exempt unless the plan holds assets in a trust or operates as a multiple employer welfare arrangement. Fully insured plans with fewer than 100 participants are typically exempt as well.
One boundary worth stating plainly: level-funded plans are self-insured ERISA plans, so they generally bypass state benefit mandates and state premium taxes that apply to fully insured products.9Self-Insurance Institute of America, Inc. Self-Insured Group Health Plans That’s part of the savings story, but it also means the specific benefits your state requires on fully insured plans may not appear in your level-funded plan unless you build them in.
Access to Claims Data
Fully insured carriers typically share little about how your employees use their benefits. You get aggregate summaries at renewal showing that costs went up some percentage, with little detail on what drove the increase. Targeting wellness programs, negotiating with providers, or pushing back on a rate hike with specifics is difficult.
Level-funded plans provide detailed utilization reports because you’re funding the claims directly. These reports break down spending by category: pharmacy costs, emergency room visits, outpatient procedures, specialist referrals, without identifying individual employees. If 30 percent of claims dollars are going to a particular condition or drug class, you can adjust plan design, add a disease management program, or negotiate with a pharmacy benefit manager. At renewal, you can show a prospective carrier or TPA exactly what the risk looks like instead of starting blind.
Who Qualifies for Level Funding
Level-funded products were originally built for mid-sized employers, but the eligibility floor keeps dropping. Most major carriers now quote groups as small as 10 to 15 enrolled employees, and some will quote at five. The typical sweet spot is 10 to 200 employees. Carriers assess both group size and health profile during underwriting, so clearing the minimum headcount doesn’t guarantee a competitive quote.
Switching Between Models
Moving from fully insured to level funded means going through medical underwriting. You’ll need enrollment data, census information, and possibly health questionnaires. Favorable health profiles often produce immediate savings; groups with significant chronic conditions or recent high-cost claims may see level-funded quotes land at or above their fully insured renewal. The transition itself doesn’t create a coverage gap as long as effective dates align, but benefits can differ because level-funded plans aren’t bound by state mandates that shaped your old plan.
Terminating a level-funded contract requires advance written notice. At least one major carrier requires 15 business days’ notice before the requested termination date, and late notice can leave the plan active past your intended end date along with additional costs.10UnitedHealthcare. Level Funded Plan Termination Notice Requirement Update Review the termination section of the Administrative Services Agreement well before the plan year ends.
Run-out claims also matter. When a level-funded plan terminates, employees may have claims incurred during the plan year that haven’t been submitted or fully processed yet. Those claims remain the plan’s responsibility. Most level-funded contracts include a terminal liability provision that extends the claims payment period, typically 3 to 12 months after the plan ends, so incurred-but-not-reported claims can still be paid from the claims fund and covered by aggregate stop-loss. Some administrators require employers to purchase terminal liability coverage up front. If you’re switching, confirm who pays for claims that straddle the transition.
How to Choose Between Them
Fully insured makes sense when predictability outweighs potential savings, when your group’s health profile is likely to underperform in underwriting, when you want the carrier to carry compliance and claims administration, and when you don’t want fiduciary exposure for plan assets.
Level funding makes sense when your workforce skews younger and healthier, when you have the administrative capacity (or a broker and TPA who do) to handle ERISA reporting and fiduciary duties, when access to utilization data would meaningfully change how you manage the plan, and when a potential surplus refund and lower baseline cost justify the renewal volatility that comes with your group’s own claims experience driving the price.