Level funded insurance is a group health plan that gives an employer a fixed, predictable monthly payment while treating the coverage as self-insured underneath. Each payment is split into three parts: money set aside to pay employee medical claims, administrative fees for the third-party administrator, and a stop-loss premium that caps the employer’s exposure if claims run high. If employees use less care than projected during the plan year, the employer gets the unused claims money back. If costs blow past projections, stop-loss coverage absorbs the excess. That structure is why level funding has become a common choice for employers with roughly 5 to 100 employees who find fully insured premiums too rigid and pure self-funding too risky.
How the Monthly Payment Is Split
The mechanic that defines a level funded plan is the way each month’s check gets divided. Every payment feeds three buckets:
- Claims fund. The largest portion goes into an account earmarked for paying employee medical claims during the plan year. The carrier or TPA projects expected claims based on the group’s demographics, health history, and plan design, then divides that projection into twelve equal monthly deposits. This is the bucket that produces a refund if actual claims come in below projections.
- Administrative fees. A fixed amount covers the TPA’s services: network access, claims processing, pharmacy benefit management, compliance support, and member services. These fees are not refundable.
- Stop-loss premium. The remainder buys the stop-loss coverage that caps the employer’s exposure on both individual high-cost claimants and total plan claims for the year.
The important distinction from a fully insured plan is what happens to the claims fund. In a fully insured arrangement, premium dollars go into the carrier’s general pool and stay there whether claims come in high or low. In a level funded plan, the claims fund belongs to the plan. Money that isn’t spent on claims flows back to the employer as a refund or a credit against the next plan year.
How It Compares to Fully Insured and Self-Funded Coverage
A fully insured plan is the familiar setup: the employer pays a set premium and the carrier takes all the claims risk. Premiums are based on community rating, the pooled risk of everyone enrolled with that carrier in a region, so an individual employer’s good year rarely translates into lower rates the next year.
A self-funded plan sits at the opposite end. The employer pays claims directly out of cash flow, buys stop-loss coverage for catastrophic situations, and hires a TPA to run the plan. Savings potential is higher because the employer keeps every dollar not spent on claims, but cash flow can swing hard month to month, which is uncomfortable for smaller groups.
Level funding sits in between. Legally, these plans are structured as self-funded arrangements, which puts them under federal ERISA regulation rather than most state insurance mandates. Operationally, they feel like fully insured plans because the employer writes the same check every month. The trade-off compared with community-rated fully insured coverage is that level funded premiums are underwritten based on the specific group’s health profile. A company with a healthier workforce can pay meaningfully less. A company with older, higher-cost employees may pay more, or may not qualify at all.
Stop-Loss Coverage
Stop-loss insurance is what makes level funding workable for employers who cannot absorb a worst-case claims year on their own. It comes in two layers, and most level funded arrangements include both.
Specific stop-loss caps exposure on any single covered person. If one employee runs up $400,000 in cancer treatment, the employer is responsible only up to the specific deductible (the attachment point), and the stop-loss carrier reimburses everything above it. For groups of around 50 employees, specific attachment points commonly land between $20,000 and $50,000. Because the stop-loss policy itself is fully insured, it falls under state insurance regulation, and a number of states set minimum attachment points (typically between $10,000 and $40,000) to prevent level funded plans from functioning as fully insured coverage in disguise.
Aggregate stop-loss caps total plan claims for the year. It kicks in when paid claims exceed an aggregate attachment point, commonly set at 120% to 125% of expected claims. This is the protection against a scenario where no single claim is catastrophic but the whole group runs hot at once.
Lasering
Carriers sometimes use a practice called lasering, in which an employee with known high-cost conditions is assigned a higher individual specific deductible than the rest of the group. An employee whose chronic condition cost $150,000 last year might be lasered at $175,000 while everyone else stays at $30,000. The stop-loss premium goes down, but the employer takes on concentrated risk on that one person.
Some carriers offer a no-new-laser rider that prevents additional lasers at renewal. These riders are generally available for groups carrying specific deductibles of $25,000 or more and come with a premium surcharge. They typically must be elected upfront, not after a bad claim year, so the time to ask about one is before the plan year starts.
Getting Reimbursed
Collecting on stop-loss coverage is not automatic. The employer or TPA has to submit detailed documentation, including itemized bills and proof of payment, within the deadlines the policy sets. Most contracts include run-out provisions that extend the filing window for claims incurred during the plan year but processed after it ends. Missed deadlines and incomplete submissions are a common reason reimbursements get denied, so clean records throughout the year matter directly to whether the safety net pays out.
Who Can Get a Level Funded Plan
Level funded plans are most common among employers with roughly 5 to 100 employees, though some carriers extend them to groups up to 250, and minimum group sizes can go as low as five enrolled employees. Because these plans are classified as self-insured, they are subject to individual group underwriting rather than the community rating used for fully insured small group plans. The carrier reviews the group’s age distribution, geography, industry, historical claims data if available, and sometimes aggregated health questionnaire responses.
That underwriting distinction produces both the opportunity and the risk. A young, healthy workforce at a tech startup may see level funded rates 15% to 25% below comparable fully insured premiums. A construction firm with an older workforce and prior high-cost claims may get quoted at or above fully insured rates, at which point level funding stops making sense. Groups with fewer than two years of credible claims history are typically priced more conservatively because the carrier has less data to work with.
One boundary worth naming: because level funded plans are self-insured for regulatory purposes, they are not required to cover the full set of ACA essential health benefits that apply to non-grandfathered fully insured small group plans. Most carriers design benefits broadly comparable to fully insured offerings, but reviewing the plan document beats assuming.
What Employees Pay
Employees share the cost through payroll deductions for their portion of the premium and through out-of-pocket costs when they use care. On average, employers in the private sector cover about 69% of family coverage premiums, with employees paying the remaining 31%, according to Bureau of Labor Statistics data from March 2025.1U.S. Bureau of Labor Statistics. Medical Plans: Share of Premiums Paid by Employer and Employee for Family Coverage Individual employers set their own split, and contribution percentages often differ between employee-only and family tiers.
Beyond the premium share, employees face deductibles, copays, and coinsurance. Many level funded plans carry individual deductibles between $1,500 and $5,000, after which the plan pays a percentage of costs (commonly 70% to 90%) and the employee pays the rest until hitting the plan’s out-of-pocket maximum. For the 2026 plan year, federal rules cap that maximum at $10,600 for individual coverage and $21,200 for family coverage on non-grandfathered plans.2HealthCare.gov. Out-of-Pocket Maximum/Limit Plans can set lower maximums, but none can exceed the federal ceiling.
Employers offering a high-deductible health plan through their level funded arrangement can pair it with a health savings account. For 2026, HSA contribution limits are $4,400 for self-only coverage and $8,750 for family coverage. To qualify, the HDHP must carry a minimum deductible of $1,700 for self-only coverage or $3,400 for family coverage, with out-of-pocket maximums no higher than $8,500 (self-only) or $17,000 (family).3Internal Revenue Service. Notice 2026-05: HSA Contribution Limits for 2026 Plans that don’t meet HDHP requirements can still pair with a flexible spending account.
What the Employer Is Responsible For
Running a level funded plan means picking up compliance work that a fully insured carrier would otherwise handle. Four areas matter most.
ERISA and Plan Documents
Because level funded plans are self-insured, they are governed by the Employee Retirement Income Security Act. The employer must provide every participant with a Summary Plan Description that spells out covered benefits, exclusions, how to file a claim, and what to do if a claim is denied.4eCFR. 29 CFR 2520.102-3 – Contents of Summary Plan Description The SPD must accurately reflect the plan as of no earlier than 120 days before it is distributed. ERISA also imposes fiduciary duties. Anyone exercising discretion over benefits decisions, whether the employer or a TPA, is a fiduciary to the extent of that discretion.5U.S. Department of Labor. Understanding Your Fiduciary Responsibilities Under a Group Health Plan A TPA that only handles paperwork is not a fiduciary; one that decides whether a claim qualifies for coverage crosses the line.
ACA Reporting
Applicable large employers (those with 50 or more full-time equivalent employees) must report health coverage offers to the IRS. Section 6056 covers whether the employer offered coverage to full-time employees.6Internal Revenue Service. Questions and Answers on Reporting of Offers of Health Insurance Coverage by Employers – Section 6056 Section 6055 covers who was actually enrolled, which is particularly relevant for self-insured plans, including level funded arrangements.7Internal Revenue Service. Questions and Answers on Information Reporting by Health Coverage Providers – Section 6055 Employers with self-insured plans combine both on Forms 1094-C and 1095-C. Penalties for incorrect or missing statements start at $250 per form under Section 6722, with reductions for prompt correction and higher amounts for intentional disregard.8Office of the Law Revision Counsel. 26 USC 6722 – Failure to Furnish Correct Payee Statements
Applicable large employers that fail to offer minimum essential coverage to at least 95% of full-time employees also face the ACA’s employer shared responsibility penalty, and a separate per-employee penalty applies where coverage is unaffordable or fails to provide minimum value and an employee receives a marketplace premium tax credit.9Internal Revenue Service. Employer Shared Responsibility Provisions
Form 5500 and PCORI
Plans covering 100 or more participants at the start of the plan year must file a full Form 5500 with the Department of Labor each year. Smaller plans may qualify for the streamlined Form 5500-SF. Plans hovering between 80 and 120 participants can elect to file in the same category as the prior year to avoid toggling between forms when enrollment fluctuates.10Internal Revenue Service. Form 5500 Corner
Sponsors of self-insured plans, including level funded plans, also owe an annual fee to the Patient-Centered Outcomes Research Trust Fund. For plan years ending between October 1, 2025, and September 30, 2026, the fee is $3.84 per covered life, reported on IRS Form 720 and due by July 31 of the year following the plan year’s end.11Internal Revenue Service. Patient-Centered Outcomes Research Trust Fund Fee: Questions and Answers The dollar amount is small enough that many employers don’t realize it exists until an audit surfaces it.
Transparency Files
Self-funded group health plans must publish machine-readable files disclosing in-network negotiated rates and out-of-network allowed amounts. The files must be publicly accessible, free, and updated monthly.12Federal Register. Transparency in Coverage – Proposed Rule Employers who delegate the technical work to a TPA should confirm the files are actually being published, because the compliance obligation rests with the plan sponsor regardless of who does the work.
Cash Flow
The claims fund draws from employer contributions across the year, so the employer has to maintain reserves adequate to avoid payment disruptions. Watching monthly claims trends with the TPA gives early warning if spending is running above projection. If it’s running below, the surplus becomes a real financial benefit, but only if the employer actually reconciles and claims it.
Surplus Refunds at Year-End
The refund is the headline benefit of level funding. When actual claims come in below the funded amount, the employer receives the difference back, either as a check or as a credit against next year’s payments. The mechanics depend on the contract. Some agreements return 100% of unused claims funds; others use a shared-savings formula where the carrier keeps a percentage.
Tax treatment matters. The refund generally counts as taxable income to the employer, since the original payments were deducted as a business expense. The IRS has not issued detailed guidance specific to level funded surplus refunds, so timing and reporting are worth reviewing with a tax advisor, particularly if the refund is applied as a credit rather than distributed as cash.
Wellness programs, preventive care incentives, and plan designs that steer employees toward cost-effective providers all improve the odds of a surplus. None of that is unique to level funding, but the payoff is more direct: every avoided claim dollar comes back to the employer rather than staying in a carrier’s reserves.
Renewal and Ending the Plan
Level funded plans renew annually, and renewal is where the real cost picture emerges. The carrier reunderwrites using the group’s actual claims data from the prior year. A good year can produce flat or reduced rates. A bad year, even one driven by a single catastrophic claim, can push rates up sharply or prompt the carrier to impose new lasers on high-cost individuals. Renewal projections should be requested at least 90 days before the plan year ends. Rate-lock provisions guaranteeing terms for multiple years exist but are less common and usually cost extra.
If the employer ends the plan, whether to switch arrangements or because the business is closing, the termination clause governs what happens next. Most policies require 30 to 90 days’ advance notice. The critical question is what happens to claims incurred before termination but not yet processed. Some contracts include run-out provisions that give the TPA three to six months to finish processing outstanding claims. Others cut off reimbursement at termination, leaving the employer to pay unpaid claims out of pocket.
Employers moving back to fully insured coverage should ask about terminal liability coverage, a stop-loss endorsement that extends specific and aggregate protection for claims incurred during the plan year but paid after the policy ends. It typically has to be elected at the start of the contract rather than at termination, and adds roughly 10% to the stop-loss premium for a three-month extension or 15% for six months. Unused claims reserves at termination are another sticking point: some contracts refund the balance to the employer, others retain it. That clause is much easier to negotiate before signing than at exit.