Short answer: level-funded health insurance is a self-funded group health plan packaged to feel like a fully insured one. The employer pays the same amount every month. That payment funds expected claims, buys stop-loss insurance that caps the employer’s risk, and covers administration. If claims come in lower than expected, the employer may get part of the surplus back. If they come in higher, stop-loss pays the difference, and the next renewal reflects it.
Michigan Employers’ Guide to Level-Funded Health Insurance
- Fixed monthly cost. Budgeting works like fully insured coverage, even though the plan is technically self-funded.
- Upside if claims run low. Some or all of an unused claims fund may come back as a refund or credit, depending on the carrier’s terms.
- Health underwriting decides the price. Groups with good claims usually benefit; groups with a known large claim often do better staying fully insured.
- You take on self-funded plan duties. Plan documents, nondiscrimination testing and the PCORI fee become the employer’s job.
How the monthly payment is built
Every level-funded payment has three parts. The carrier or administrator sets them from your census and, for most groups, a health questionnaire or claims history.
| Part | What it pays for | What to ask |
|---|---|---|
| Claims fund | Expected medical and pharmacy claims for the year, spread evenly across 12 months | How was expected claims set, and what happens to money left over? |
| Stop-loss premium | Insurance that pays claims above a per-person limit (specific) and above a total for the group (aggregate) | What are the specific deductible and aggregate attachment, and is the contract 12/12, 12/15 or 12/24? |
| Administration | Claims processing, network access, pharmacy management and reporting | Which services are included, and what is billed separately? |
Because the payment is fixed, cash flow looks like a fully insured plan. The difference is what happens at the end of the year.
What happens at the end of the plan year
- If claims ran low: the unused part of the claims fund may be refunded, credited toward the next year or shared with the carrier. Terms range from a full refund to half or less, and some carriers pay only if you renew. Read this clause before signing; it is where most of the difference between products sits.
- If claims ran high: aggregate stop-loss pays claims above the attachment point, so the employer does not write a larger check that year. The renewal will reflect the experience, and a member with ongoing high costs can be “lasered” with a separate, higher deductible.
- If you leave level-funding: claims incurred before the switch but paid afterward, known as run-out, still need a home. A 12/24 contract or terminal liability coverage handles them; a 12/12 contract may not.
Level-funded vs fully insured vs self-funded
| Fully insured | Level-funded | Self-funded | |
|---|---|---|---|
| Monthly cost | Fixed premium | Fixed payment | Varies with claims, plus fixed fees |
| Who carries claims risk | The carrier | The employer, capped by stop-loss | The employer, capped by stop-loss |
| Surplus if claims are low | Kept by the carrier | Some or all returned, per the contract | Stays with the employer |
| Claims data | Limited, especially for small groups | Usually monthly reporting | Full detail |
| State benefit mandates | Apply | Generally do not apply (ERISA) | Generally do not apply (ERISA) |
| Typical size | Any | Small and mid-size groups | Usually larger groups |
For the full comparison, see health plan funding options compared and self-funded vs fully insured plans.
Who level-funding fits, and who it does not
In Michigan’s small-group market, fully insured plans for employers with 1 to 50 employees are community rated: premiums vary by factors such as age and location, not by the group’s health. Level-funded plans are priced on the group’s own health. That cuts both ways.
- Usually a good fit: a younger or healthier group paying a community rate that reflects everyone else’s claims, an employer that can live with a renewal moving with its own experience, and a finance team that wants monthly claims reporting.
- Usually a poor fit: a group with a known large ongoing claim, a pregnancy or a planned surgery, where underwriting will price that in or laser it; and an employer that needs the renewal to stay predictable no matter what happens.
- Worth checking every year: the answer changes as your workforce and claims change. A group that belongs in level-funding this year may belong back in fully insured coverage later.
Compliance duties the employer takes on
A level-funded plan is a self-funded ERISA plan, even though it feels insured. That brings responsibilities a fully insured employer mostly leaves to the carrier:
- Plan document and SPD. The employer is the plan sponsor and needs a written plan document and summary plan description. Most carriers provide templates; someone still has to review them.
- Section 105(h) nondiscrimination. Self-insured medical plans cannot favor highly compensated employees in eligibility or benefits. See nondiscrimination testing.
- PCORI fee. Self-insured plans pay this small per-member fee through IRS Form 720, due July 31.
- Form 5500. Required once the plan has 100 or more participants at the start of the year.
- COBRA and HIPAA privacy. COBRA applies as it does to any group plan with 20 or more employees, and the employer must keep plan health information separate from employment decisions.
Because the plan is self-funded, most state benefit mandates do not apply to it. The stop-loss policy, however, is insurance and remains regulated by the state.
What a successful move looks like
One CFH client, a Troy professional services firm, had been absorbing annual increases of about 9.3%. The group moved to a level-funded plan with a $55,000 specific stop-loss deductible, and at the same time renegotiated its pharmacy contract and enrolled eligible members in manufacturer assistance programs. First-year savings came to 23%, about $211,000, with benefits maintained. The full story is in what to look for in a benefits consulting firm.
That result came from that group’s claims, size and pharmacy mix, and it does not transfer automatically. What transfers is the method: price level-funding against your own data, read the surplus and run-out terms, and fix the pharmacy contract at the same time.
Questions to ask before you sign
- What share of any surplus comes back to us, when, and does it depend on renewing?
- What are the specific deductible and aggregate attachment, and how much can the renewal rise if claims run high?
- Is the stop-loss contract 12/12, 12/15 or 12/24, and what happens to run-out if we leave?
- Can a member be lasered at renewal, and is there a cap on renewal increases?
- Which network and pharmacy benefit manager come with the plan, and are rebates passed through?
- Who provides the plan document, SPD and 105(h) testing, and at what cost?
Frequently asked questions
What is level-funded health insurance?
Level-funded health insurance is a self-funded group health plan with a fixed monthly payment that covers expected claims, stop-loss insurance and administration. If claims run lower than expected, the employer may receive part of the surplus back.
Is level-funded health insurance cheaper than fully insured?
It can be for groups with better-than-average claims, because pricing reflects the group’s own health instead of a community rate. For groups with high or unpredictable claims, fully insured coverage is often cheaper and more stable.
What happens if claims exceed the level-funded amount?
Aggregate stop-loss insurance pays claims above the attachment point, so the employer’s cost for that year stays at the fixed amount. The following renewal will reflect the higher claims.
Do we get money back if claims are low?
Often, but the terms vary. Some contracts refund all of the unused claims fund, many refund a share, and some pay only if you renew. Check the surplus clause before signing.
How many employees do you need for a level-funded plan?
Each carrier sets its own minimum group size and underwriting rules. Level-funding is most common among small and mid-size employers, and some carriers offer it to very small groups.
Is a level-funded plan subject to state insurance mandates?
Generally no. A level-funded plan is a self-funded ERISA plan, so most state benefit mandates do not apply. The stop-loss policy is still insurance and is regulated by the state.
Could level-funding lower your cost?
CFH Insurance Consultants is an independent employee benefits firm, founded in 2007. We are licensed insurance brokers, and for proper coverage of an account we work in teams of five: an account executive, an account manager, a plan analyst, customer service and IT. We will price level-funded, fully insured and self-funded options against your own census and claims, and walk you through the surplus, stop-loss and run-out terms side by side before you decide. Send us your renewal, call 248.370.8853, or book a 30-minute call.
Related reading: Level-funded health plans · What is stop-loss insurance? · Stop-loss captive vs level-funded · What is an ASO health plan?
This article is general information, not legal or tax advice. Contract terms vary by carrier; confirm them in writing before enrolling.
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