6 min read
Quick Answer
In a fully funded plan, the employer pays the carrier a fixed monthly premium and the carrier carries the claims risk. In a self-funded plan, the employer pays claims directly and buys stop-loss insurance to cap its exposure. Self-funding can lower cost and open up claims data, but it brings variable cash flow and more compliance responsibility.
Self-Funded vs Fully Funded Health Insurance: Which Is Right for Your Business?
The short answer: in a fully funded (fully insured) plan you pay the carrier a fixed premium and the carrier takes the claims risk. In a self-funded plan you pay claims as they occur and buy stop-loss insurance to cap the downside. Groups under about 50 employees are almost always fully insured. Self-funding becomes practical at roughly 100 enrolled employees with steady claims history, and level-funded plans sit in between for groups that are not quite there.
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Compare self-funded and fully insured cost — Model both funding approaches for your group size and claims.
How Each Model Works
Fully funded. The carrier collects a premium, pays every claim, and keeps the difference. Your cost is predictable, and the carrier handles claims administration, networks and most regulatory filings. The trade-off is that the premium includes the carrier’s risk charge, profit margin and state premium taxes, and you rarely see your own claims data in detail. If your employees are healthier than average, you subsidize everyone else in the carrier’s pool. Fully insured plans are also subject to medical loss ratio rebate rules, so some premium can come back if the carrier spends too little on care.
Self-funded. You pay claims directly from company funds, usually through a third-party administrator (TPA). To keep one large claim from damaging the business, you buy stop-loss coverage. Specific stop-loss reimburses claims on any one person above a set attachment point. Aggregate stop-loss caps total plan claims for the year. Because you control the plan design, network and vendors, you can build around your workforce. You also keep any unspent claims money, and you get full claims data. The cost is that monthly spending moves with claims. Our guide to alternative funding and stop-loss covers how this works in practice.
Level-funded. A hybrid. You pay a fixed monthly amount that covers expected claims, stop-loss and administration, and at year end a good claims year may produce a refund. It gives smaller groups some of the data and upside of self-funding with a cap on the monthly swings.
Side-by-Side Comparison
| Fully funded | Self-funded | |
|---|---|---|
| Who carries claims risk | Carrier | Employer, capped by stop-loss |
| Monthly cost | Fixed premium | Varies with claims |
| Unused claims dollars | Carrier keeps them | Employer keeps them |
| Plan design | Carrier’s menu | Customizable |
| Claims data | Limited | Full detail |
| State mandates and premium tax | Apply | Generally do not apply (ACA and ERISA still do) |
| Typical group size | Under 50, or any size that wants certainty | About 100 enrolled and up, with stable claims |
What Self-Funding Does Not Remove
Self-funded plans are usually exempt from state insurance mandates and state premium tax, but not from federal law. ERISA governs the plan, which means you need a written plan document and summary plan description (SPD), often delivered as a wrap document. The ACA still applies, including affordability testing and employer reporting and compliance obligations. Once a plan reaches 100 participants, Form 5500 filing starts. These are manageable, but they are the work the carrier does for you in a fully insured plan, so budget for the TPA or advisor who will do it.
Stop-Loss: Where Self-Funded Plans Go Wrong
The big claim is rarely the problem, because stop-loss exists for it. The problems come from the contract. Check three things before you sign:
- Contract basis. The stop-loss contract period must match your plan year and run-in/run-out terms, or claims can fall into a gap nobody covers.
- Lasering. The carrier can set a higher attachment point for a named person with a known condition. A low headline premium can hide a laser that leaves your largest known risk uncovered.
- Specific and aggregate levels. A lower specific attachment point costs more but lowers volatility. Set it against what your cash flow can actually absorb.
Which Model Fits Your Business
A fully funded plan fits when you have fewer than about 50 employees, when budget certainty matters more than potential savings, or when you do not want to manage plan administration. Self-funding fits when you have about 100 or more enrolled employees, a reasonably healthy and stable claims history, enough cash flow to absorb a bad quarter, and a desire for the data and control. If you are between those, ask for a level-funded quote, and consider reference-based pricing as a way to reduce provider costs inside a self-funded plan.
Healthier-than-average groups tend to benefit most from leaving the carrier pool. Groups with a few high-cost members, or ones that expect to grow quickly and cannot predict claims, are often better served staying fully funded for another year. Either way, the answer should come from your claims experience, not from a sales deck. See our approach to health cost strategy for how we model both paths, and our overview of group health plans for Michigan employers for the full range of options.
If you would like to see the numbers for your own group, send us your current renewal and we will model fully funded, level-funded and self-funded side by side.
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Send Us Your RenewalQuestions We Get
What is the main difference between self-funded and fully funded health insurance?
In a fully funded plan, the employer pays a fixed premium and the insurance carrier pays all claims. In a self-funded plan, the employer pays claims directly and buys stop-loss insurance to cap the cost of large claims.
How many employees do you need to self-fund?
There is no legal minimum, but self-funding is generally practical at about 100 enrolled employees with a steady claims history. Smaller groups under 50 are usually fully insured, and level-funded plans are an option in between.
What is stop-loss insurance?
Stop-loss is insurance the employer buys to limit self-funded risk. Specific stop-loss reimburses claims on any one person above an attachment point. Aggregate stop-loss caps total plan claims for the year.
What is the real risk of self-funding?
Claims volatility, bounded by stop-loss coverage. The employer pays claims as they come, so the monthly cost moves, and stop-loss caps both individual claims and the total. The risks that catch employers out are usually a stop-loss contract that does not line up with the plan year, or a lasered condition that leaves a known risk uncovered.
Does a self-funded plan still have to follow the ACA?
Yes. Self-funded plans are generally exempt from state insurance mandates and premium tax, but ERISA and federal rules including the ACA still apply. Plans with 100 or more participants also file Form 5500.
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Also from CFH: Gene therapy and million-dollar claims: what small and mid-size employers can do · Choosing a TPA for a self-funded health plan
Related Guides
Stop-Loss and Claims Risk Before Projected Savings
How stop-loss coverage protects self-funded plans from large claims.
Fully Insured, Level-Funded and Self-Funded Plans Compared
The trade-offs between fully insured, level-funded and self-funded health plans.
Employer Benefits Guides: Eligibility, Plan Design, Life Events and Rules
Our library of plain-English guides on eligibility, plan design and compliance.
