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Level-funded health plans: how they work, who they suit and the catches

A level-funded plan is a self-funded plan with a fixed monthly payment, built-in stop-loss and a possible refund. How it works, who it suits, and what to check.

4BusinessInsurance · Published October 10, 2026

A level-funded health plan is a self-funded plan packaged to look like an insured one. The employer pays the same amount every month, which bundles three things: money to pay expected claims, a fee to the administrator, and the premium for stop-loss insurance that caps the employer's exposure. If claims run below the funded amount, many programs return some or all of the surplus; if claims run above it, the stop-loss carrier steps in beyond the attachment points.

The monthly payment, piece by piece

Component What it pays for
Claims fund Expected claims for the group, based on medical underwriting of the census and, often, health questionnaires
Administration The third-party administrator (TPA): claims processing, network access, customer service, reporting
Specific stop-loss Reimburses claims over a per-person deductible, for example one member's claims past a stated dollar amount
Aggregate stop-loss Reimburses total group claims once they pass a percentage of expected claims, commonly in the neighborhood of 125% (the percentage is set by the contract)

Because the first three items are fixed up front, the budget looks like a premium. The difference is what happens at the end of the plan year. The program reconciles all claims paid against the funded amount. Where the claims fund is not used, a refund (sometimes shared with the carrier) may be returned to the employer. Whether the refund is available at all, how long run-out claims are measured, and whether a surplus is "rolled" toward the next year differ by program, so read the contract rather than the brochure.

Who level funding suits

Level funding is built for groups that are healthy enough to beat the community-rated insured premium but too small to tolerate real claim volatility. In KFF's 2025 Employer Health Benefits Survey (released October 22, 2025), 37% of covered workers at firms with 10 to 199 workers were in level-funded plans, and another 27% in other self-funded plans, which shows how mainstream the hybrid has become for small employers.

It is a good fit when:

  • The group's claims have run below the fully insured premium and the census is young or stable.
  • The owner wants claims data to manage costs and can accept a small chance of a bad year.
  • The firm wants to avoid the ACA community-rating averaging with sicker groups.

It is a poor fit when:

  • The group includes members with known high-cost conditions, who the carrier is likely to laser or price into the rate.
  • The employer cannot accept the possibility that the rate rises sharply at renewal once a large claim is on the record. A level-funded group has no community-rated floor; the renewal is underwritten on its claims.
  • A state limits stop-loss for small groups, which is covered below.

Medical underwriting and what it means for the group

An insured small-group plan cannot rate on health status. A level-funded plan can, and does. Expect a census, claims history from the prior carrier (typically 12 to 24 months), and sometimes individual health questions for each enrolled employee. Employees with serious known conditions may be quoted at a higher rate, excluded through a laser on the stop-loss, or the group may be declined. Group-level applications usually require a high participation percentage, because carriers need healthy lives in the pool.

Under federal law, employers and plans may not discriminate against individuals in eligibility for a group health plan based on a health factor. The underwriting happens at the group level on the aggregate, not by refusing to enroll a person with a diagnosis. If you offer a plan to some employees, that eligibility rule should come from the plan terms, not from claims history. Get a benefits attorney's read if you are tempted to exclude anyone for health reasons.

A worked example (hypothetical)

Say a 25-employee marketing agency has 18 enrolled employees and a quote of $18,000 per month for a level-funded plan. Hypothetically, the breakdown is $12,600 for the claims fund, $2,400 for administration and network fees, and $3,000 for stop-loss.

  • If annual claims total $135,000, against a fund of $151,200 ($12,600 x 12), the plan year ends with a $16,200 surplus on paper. A refund of the unused amount, if the contract provides for it, is paid after run-out closes, often several months after the plan year ends.
  • If annual claims total $185,000, the employer is responsible for the $33,800 over the fund, up to the aggregate stop-loss. Some programs spread this through a higher renewal and not as a single bill.
  • If one member generates $120,000 in claims and the specific deductible is $15,000, the stop-loss carrier reimburses the portion above $15,000, and the employer's share is capped at $15,000 for that member.

Enter your own quote and claims scenarios in the group health insurance cost and affordability calculator to see whether the downside is one the business can carry.

The contract terms that decide the outcome

  1. Specific deductible. A lower deductible costs more in premium and leaves you less exposed. Programs for small employers often use deductibles in the low five figures. Ask for options.
  2. Aggregate attachment and corridor. Whether it is 120% or 125% of expected, and whether the aggregate is monthly accumulating or annual.
  3. Contract basis. "Incurred and paid in the same 12 months" is common for level-funded, which leaves run-out claims unprotected unless you buy run-out coverage; a longer paid basis costs more but narrows the gap.
  4. Lasers. Specific individuals with a specific higher deductible. Get them in writing at quote and watch them at renewal.
  5. Refund terms. Is the surplus refunded in full, shared, or credited toward renewal? Is there a minimum claim threshold before the refund?
  6. Rate guarantees. Level-funded renewals are re-underwritten. Ask what the carrier has done on groups with a large claim.
  7. Pharmacy. Specialty drug management and PBM contracts; high-cost drugs can reach the specific deductible by themselves. See PBMs, GLP-1 drugs and employer health costs.

Regulatory points

Level-funded plans are group health plans covered by ERISA, and the employer is the plan sponsor and fiduciary even though a TPA does the work. That means plan documents, summary plan descriptions, COBRA, claims and appeals procedures, and in some cases Form 5500. For plans with 100 or more participants see form 5500 for health and welfare plans: who files and when. The employer owes the PCORI fee for a self-funded plan, 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).

Because the stop-loss is a contract between the plan and the carrier, state insurance law can govern it. Some states set a minimum specific attachment point or minimum aggregate percentage for stop-loss sold to small employers, which restricts or eliminates level-funded products there. Others treat the structure like fully insured coverage for small-group purposes. Check your state with workers' comp and benefits requirements by state and ask the broker for the stop-loss certificate of insurance and the filed form.

A level-funded ALE still needs to meet the ACA employer mandate; the plan must be affordable and provide minimum value (The ACA employer mandate: who must offer coverage and the 2026 penalties). Low-cost designs sometimes fail minimum value, so confirm it.

Key takeaways

  • Level funding is self-funding with a fixed monthly payment, built-in specific and aggregate stop-loss and a possible year-end refund.
  • It can undercut community-rated insured premiums for healthy groups because it is medically underwritten.
  • The risk is in the contract: deductibles, lasers, contract basis, run-out and renewal re-underwriting.
  • KFF's 2025 survey found 37% of covered workers at firms with 10 to 199 workers in level-funded plans.
  • Check your state's stop-loss rules and confirm minimum value if you are an applicable large employer.

Terms used in this guide

Level-funded plan A self-funded health plan with one fixed monthly payment covering expected claims, fees and stop-loss premium, with possible refunds if claims run low. Self-funded health plan A group health plan where the employer pays employees' claims itself rather than paying an insurer premiums, usually backed by stop-loss insurance. Stop-loss insurance Insurance that reimburses an employer with a self-funded health plan when one person's claims, or the plan's total claims, pass a set dollar level. ERISA The 1974 federal law setting fiduciary, reporting and disclosure standards for private-sector retirement and welfare benefit plans, enforced by the DOL. Attachment point The loss amount at which an excess, umbrella or reinsurance layer starts paying, normally the top of the underlying limits or retention beneath it. Aggregate limit The most an insurer will pay for all covered claims during a policy period, however many separate occurrences or claims there are.

Related tools

Group health insurance cost and affordability calculator Totals what a group health plan costs you and your employees, then tests employee-only affordability against the ACA safe harbors for 2026 or 2027.

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