Fully insured vs self-funded health plans: which fits your business

In a fully insured health plan, the employer pays a fixed monthly premium to an insurance company, which takes the risk of the claims. In a self-funded plan, the employer pays employees' medical claims itself as they occur, usually through a third-party administrator, and typically buys stop-loss insurance to cap the bad outcomes. The choice is mostly about who carries volatility, how much of the claims data you can use, and which regulators have jurisdiction.

The core difference

Self-funded does not mean going without insurance. Almost every small and mid-sized self-funded employer insures the tail risk through stop-loss, explained in stop-loss insurance for self-funded health plans: specific, aggregate and the fine print.

How the money flows in a self-funded plan

Each month the employer funds a claims account, pays the TPA's administrative fee and the stop-loss premium. Employees' payroll deductions go toward that outlay just as they do under an insured plan. Claims that exceed the specific (per-person) deductible or the aggregate (whole-group) attachment trigger reimbursement from the stop-loss carrier. If total claims come in under what was budgeted, the employer keeps the difference. If they come in over, the employer pays up to the aggregate limit.

Self-funded plans have costs insured plans do not charge you for separately: the TPA fee, a pharmacy benefit manager arrangement, network access fees, and an annual Form 5500 filing for plans with 100 or more participants (see form 5500 for health and welfare plans: who files and when). On the other hand, insured plans embed premium taxes, carrier margin and risk charges in the rate. Self-funded employers also pay the PCORI fee, which was $3.84 per average covered life for plan years ending on or after October 1, 2025 and before October 1, 2026 (IRS Notice 2025-61), reported on Form 720 by July 31 of the following year. Fully insured plans pay it through the carrier.

What the self-funded employer gets and gives up

Advantages

• Claims experience matters. A healthy group is not averaged with a sicker block of business, and a good year produces savings instead of a renewal that has already priced in the carrier's margin.
• Plan design flexibility. Because ERISA generally preempts state insurance mandates for self-funded plans (see the Supreme Court's reading in FMC Corp. v. Holliday, 1990), the employer can tailor coverage, network and cost sharing rather than adopting a standard insured form. Federal rules, including the ACA's market reforms that apply to group health plans, still apply, and so do mental health parity and nondiscrimination rules.
• Data. You can see what is driving the spend: high-cost claimants, specialty drugs, emergency room use, which is the starting point for any serious cost management.
• Cash flow. Claims are paid after they are incurred, rather than premiums being paid ahead.

Disadvantages

• Volatility. One transplant, a neonatal intensive-care stay or a single specialty-drug therapy can consume the specific deductible in a month. Stop-loss caps the damage but not at zero.
• Fiduciary duty. The employer is a plan sponsor and fiduciary under ERISA; hiring a TPA does not transfer that. Decisions about which vendors to use must be prudent and documented. The DOL's EBSA publishes guidance for plan sponsors, and fiduciary liability and ERISA bond questions are covered in ERISA basics for small employers: what the law requires of your benefit plans.
• Stop-loss underwriting. The carrier can apply individual exclusions, called lasers, to a member with a known condition, and renewal terms can change. Contract language such as "run-in," "run-out" and "claims incurred versus paid" matters enormously.
• Administrative work. Claims appeals, COBRA, transparency and gag-clause attestations, and reporting obligations sit with the plan.

How common are the variants

KFF's 2025 Employer Health Benefits Survey, published October 22, 2025, reported that 27% of covered workers at firms with 10 to 199 workers are in self-funded plans, and that another 37% of covered workers at those firms are in level-funded plans, a hybrid with a built-in stop-loss structure. Level funding has become the standard path for small employers moving toward self-funding; it is explained in level-funded health plans: how they work, who they suit and the catches. Larger employers are much more likely to be self-funded than small ones, per the same survey.

Choosing between them: a worked example (hypothetical)

Say a 60-employee engineering firm has paid fully insured renewals that rose each year for three years. Of 45 enrolled employees, the broker's claims history shows most years' claims running well below premium. The CFO is considering a self-funded plan with a specific stop-loss deductible of $50,000 per person and an aggregate at 125% of expected claims.

Questions the CFO should answer before signing:

1. Worst-case annual cost. Expected claims plus the aggregate corridor plus fixed costs (TPA, stop-loss premium) is the maximum cash the plan could cost. Can the company absorb that number, even if it is rare?
2. Claims run-out. If the plan terminates, who pays claims incurred but unpaid, and does the stop-loss cover them?
3. Laser risk. Is there any current claimant at or above $50,000 who would be lasered at a higher level at renewal?
4. Employee experience. Does the TPA offer a network and prior-authorization process at least as good as the carrier's?
5. Exit. If claims turn bad in year two, can the company return to the fully insured market, and what would a group with its claims history be quoted? In the ACA-compliant small-group market the carrier cannot rate on health status, so returning is generally possible, but stop-loss terms may leave unpaid run-out exposure.

The group health insurance cost and affordability calculator can compare an insured premium to expected self-funded costs on your own numbers.

State and federal rules to check

A self-funded plan is mostly outside state insurance law, but states regulate stop-loss. Some states set minimum attachment points or limit the types of employers that may buy it, and that is where small employers get surprised. A state rule that says a stop-loss policy cannot attach below a stated dollar level would stop a very low-deductible level-funded design in that state. Confirm with your broker and with workers' comp and benefits requirements by state.

The ACA employer mandate applies the same way to insured and self-funded ALEs (The ACA employer mandate: who must offer coverage and the 2026 penalties). Some employers also use captives to share stop-loss risk with other employers (group captives for medical stop-loss: how employer health captives work).

Key takeaways

• Fully insured means a fixed premium and the insurer carries claims risk; self-funded means the employer carries it, usually with stop-loss on top.
• Self-funding pays off when your group's claims are consistently lower than the premium the carrier charges, and punishes you in a bad year up to the stop-loss caps.
• ERISA governs self-funded plans, so the employer is a fiduciary and the plan largely escapes state benefit mandates.
• KFF's 2025 survey found 27% of covered workers at firms with 10 to 199 workers in self-funded plans and 37% in level-funded plans.
• Model the worst-case cost, the stop-loss contract terms and your exit path before committing.