Shopping group health for your team
For an employer transitioning out of the fully insured market, level-funded health insurance is the definitive bridge to self-funding. It is engineered specifically as a middle-ground alternative for organizations that want the financial control, claims transparency, and refund potential of a self-insured plan, but cannot accept the month-to-month cash flow volatility that comes with paying massive medical claims directly out of operating capital.
In a level-funded arrangement, the employer pays a fixed, predictable monthly “premium.” That payment, however, is not a traditional insurance premium that vanishes into a carrier’s profit margin. Instead, it is divided into three distinct buckets: an administrative fee, a stop-loss insurance premium, and a localized claims fund. If your workforce stays healthy and claims run low, the money left in the claims fund at the end of the year is returned to you. If your workforce faces catastrophic health events and claims exceed the fund, the stop-loss insurance immediately kicks in, absorbing the deficit so your monthly costs never rise mid-year.
This comprehensive guide breaks down the exact mechanics of level-funded health plans, the role of stop-loss insurance, compliance considerations under federal ERISA law, and how Utah human resources and finance leaders can determine if their organization fits the mathematical sweet spot for this hybrid funding model.
To understand level-funding, it helps to understand what it is reacting against. In a traditional fully insured plan, an employer pays a flat monthly premium to an insurance carrier. In exchange, the carrier takes on 100% of the claims risk. If the group has a terrible year and incurs $1 million in medical bills, the carrier takes the loss. However, if the group has a highly healthy year and only incurs $200,000 in claims against $600,000 in premiums, the carrier keeps the entire $400,000 spread as profit. Furthermore, the carrier will not disclose the claims data, leaving the employer blind to why their rates inevitably increase at renewal.
Level-funding restructures this relationship. The employer technically takes on the claims risk (becoming a self-insured entity), but immediately caps that risk through aggressive stop-loss insurance.
Every monthly payment you make is split into three strictly defined accounts:
Because the monthly payment is fixed, the employer’s finance department can budget for healthcare exactly as they would in a fully insured environment. There are no surprise invoices if six employees require surgery in the same month.
The defining feature of a level-funded plan is the year-end accounting. At the end of the contract term (and an allowable run-out period for late claims), the TPA reconciles the claims fund.
If the employer funded $400,000 into the claims account over twelve months, but the employees only utilized $250,000 in actual healthcare services, there is a $150,000 surplus. Depending on the specific contract drafted at the start of the year, that surplus is either returned 100% to the employer in a cash refund, credited toward the next year’s administrative fees, or split 50/50 with the carrier. If claims had instead run to $500,000, the stop-loss carrier would have absorbed the $100,000 deficit, and the employer would owe nothing extra.
Stop-loss insurance is the engine that makes level-funding mathematically viable for mid-sized employers. Without it, a single catastrophic health event could bankrupt the claims fund and bleed into the employer’s general operating revenue.
Stop-loss comes in two forms, and both are embedded directly into a standard level-funded contract.
Specific stop-loss protects the plan against severe, high-dollar claims incurred by a single individual. When setting up the plan, the employer and the underwriter agree on an “attachment point” (essentially a deductible for the employer).
For example, a level-funded plan might feature a $30,000 specific attachment point. If an employee is diagnosed with advanced cancer and accumulates $150,000 in medical bills, the employer’s claims fund is only responsible for the first $30,000. Once that individual hits the $30,000 threshold, the specific stop-loss policy instantly covers the remaining $120,000. The employer’s cash flow is entirely insulated from the severity of that individual’s treatment.
Aggregate stop-loss protects the plan against an unusually high frequency of claims across the entire employee population, even if no single individual hits the specific stop-loss attachment point.
Underwriters calculate an “expected claims” figure for the year based on the group’s demographics and medical history. The aggregate attachment point is typically set at 120% or 125% of those expected claims. If the entire workforce experiences a bad year—a surge of minor surgeries, emergency room visits, and expensive brand-name prescriptions—and total group utilization breaches that 120% threshold, aggregate stop-loss steps in to pay every dollar above the line.
One of the most critical mechanisms of level-funding is the “accommodation” or “advancement” feature. In a traditional self-funded plan, if a company gets hit with heavy claims in January before they have built up a reserve in their claims fund, they must cover the shortfall out of pocket and wait for reimbursement.
Level-funding prevents this. If claims exceed the accumulated funds in month two, the stop-loss carrier automatically advances the money (the accommodation) to pay the providers. The employer continues paying their fixed monthly rate without interruption. This smoothing of cash flow is the exact reason level-funding appeals to CFOs and finance directors.
Who is level-funding actually for? The answer is dictated by the law of large numbers and the administrative overhead of the product itself.
While insurance carriers market level-funded products to groups as small as five lives, the mathematical reality of risk pooling makes very small groups highly volatile. The practical “sweet spot” for level-funding typically sits between 25 and 200 enrolled employees.
| Funding Model | Target Employer Size | Risk Exposure | Cash Flow Profile |
|---|---|---|---|
| Fully Insured | 2 - 49 Employees | Zero claims risk. Carrier keeps all surplus. | 100% predictable fixed monthly premium. |
| Level-Funded | 25 - 200 Employees | Capped claims risk. Employer keeps surplus. | Predictable fixed monthly payments. |
| Pure Self-Funded | 250+ Employees | Direct claims risk above high stop-loss limits. | Highly volatile month-to-month claims funding. |
For a 10-person company, a level-funded plan can be precarious. Administrative fees (the fixed costs that don’t go toward claims) form a disproportionately high percentage of the total spend. Furthermore, underwriting a 10-person group is highly sensitive. A single employee with a chronic condition like rheumatoid arthritis or Type 1 diabetes will skew the underwriting so severely that the fixed monthly costs will exceed standard fully insured community rates, making the plan financially unviable.
Conversely, massive enterprises usually skip level-funding entirely. An employer with 800 employees has a risk pool large enough that their month-to-month claims are naturally predictable. They don’t need the carrier to smooth their cash flow into a fixed monthly payment, because doing so requires paying a premium for the cash-flow smoothing itself. An 800-person company will simply move to a pure self-funded arrangement, pay claims as they occur, and purchase a high-deductible stop-loss policy strictly for catastrophic events.
Level-funding exists perfectly in the middle: for the 75-person Utah manufacturing firm or the 150-person software company that wants the transparency and refund potential of self-funding, but cannot afford the month-to-month volatility of paying raw claims.
One of the most powerful financial levers of a level-funded plan is its legal structure. Because level-funding is technically a self-insured arrangement, it is governed at the federal level by the Employee Retirement Income Security Act of 1974 (ERISA).
Under the Supremacy Clause of the Constitution, ERISA preempts state insurance laws. This means a level-funded plan bypasses the jurisdiction of the Utah Insurance Department and is not subject to state-mandated benefits.
Fully insured plans in Utah are subject to state health insurance premium taxes (which carriers bake directly into your premium, usually passing along a cost of around 2% to 3%). Because level-funded claims funds are not classified as traditional insurance premiums, they are exempt from state premium taxes. For a mid-sized employer spending $1 million annually on health benefits, avoiding a 3% premium tax results in an immediate $30,000 savings before a single claim is even filed.
States frequently pass legislative mandates requiring fully insured health plans to cover specific treatments, therapies, or services. While many of these mandates are broadly beneficial, they cumulatively drive up the cost of fully insured community-rated pools.
ERISA preemption allows a level-funded employer to design a plan that fits their specific workforce. While they must still comply with federal mandates (such as the Affordable Care Act’s preventive care requirements and essential health benefits), they are not forced to adopt piecemeal state mandates. This grants the HR team and benefits consultant immense flexibility to carve out bespoke plan designs, implement strategic pharmacy management programs, or alter copay structures to steer employees toward high-value, lower-cost care facilities.
In a fully insured small-group plan, an employer operates entirely in the dark. At the end of the year, the carrier delivers a renewal indicating a 15% rate increase. If the employer asks, “Why did our rates go up? What is driving our costs?” the carrier will cite privacy restrictions or proprietary algorithms and refuse to provide actionable data.
Level-funding shatters this black box. Because it is the employer’s money sitting in the claims fund, the employer owns the data.
Every month, the TPA provides detailed, de-identified claims reporting. The employer’s executive team and benefits consultant can see exactly where the healthcare budget is bleeding. The reporting will reveal:
This transparency is what makes level-funding a long-term cost containment strategy rather than just a one-year gamble. If the data shows that 30% of the group’s claims spend is going to emergency room misuse, the employer can restructure the plan design for the following year—perhaps dropping telehealth copays to $0 and raising ER copays to $500—to actively steer behavior and protect the claims fund.
Moving from a fully insured ACA community-rated plan to a level-funded plan requires passing medical underwriting. The stop-loss carrier must evaluate the risk of your specific workforce before they are willing to guarantee a fixed monthly rate.
Depending on the carrier and the size of the group, underwriting is typically conducted in one of two ways:
For smaller groups (typically under 50 employees), carriers may require every employee to fill out an individual medical questionnaire during the quoting process. This asks for a brief history of medical conditions, upcoming surgeries, and current prescriptions. The underwriter uses this self-reported data to calculate the expected claims and set the stop-loss attachment points.
For larger groups, carriers increasingly rely on predictive modeling rather than paper questionnaires. The employer provides a census (employee ages, genders, and ZIP codes) along with an authorization to run a GRX (a prescription drug utilization sweep). By analyzing the prescription drug history of the workforce over the past 12 to 24 months, underwriters can accurately predict chronic conditions and upcoming medical needs. A high volume of specialty immunosuppressants or advanced oncology drugs will immediately signal high claims risk.
If the underwriting reveals a workforce with multiple severe, ongoing medical conditions, the quoted fixed monthly costs may come back significantly higher than a fully insured alternative. Level-funding is heavily dependent on a relatively healthy risk pool. Groups with high, predictable medical expenses are usually better served hiding inside the community-rated fully insured pool where carriers cannot individually underwrite them based on health status.
One of the most complex, yet vital, concepts in level-funding is the timeline of how claims are paid. Healthcare billing is not instantaneous. An employee might visit a specialist on December 15th, but the provider’s billing department might not process and submit the claim to the TPA until late January.
This creates a liability known as Incurred But Not Reported (IBNR) claims. If your plan year ends on December 31st, who is responsible for paying that late January bill? The answer lies in the specific contract basis you purchase.
A 12/12 contract means the stop-loss policy only covers claims that are both incurred during the 12-month plan year and paid during that same 12-month window. If a claim is incurred in December but the bill arrives in January, a 12/12 contract will not cover it. Employers must physically set aside an internal cash reserve to pay for these run-out claims if they intend to leave the level-funded plan.
To protect against the IBNR tail, most level-funded plans are sold on a 12/15 or 12/18 basis. A 12/15 contract covers claims incurred during the 12-month plan year, and grants an additional 3 months (for a total of 15 months) for those claims to be submitted, processed, and paid out of the claims fund.
If a company stays on a level-funded plan and renews with the same carrier year after year, the carrier typically rolls the run-out claims into the new plan year seamlessly. However, if a company decides to terminate the level-funded plan and move back to a fully insured arrangement, they face “terminal liability”—the obligation to pay the run-out claims from the final months of the contract.
A high-quality level-funded contract will include a Terminal Liability Reserve (TLR) built into the monthly payments, ensuring that if the employer leaves the plan, there is a pre-funded bucket of money designated specifically to pay the run-out claims, preventing a sudden cash crunch.
In a fully insured plan, the carrier controls everything: the medical network, the claims processing, and the pharmacy benefits. In a level-funded environment, the employer gains the ability to “carve out” certain services to optimize costs.
Prescription drugs frequently account for 25% to 35% of an employer’s total healthcare spend, driven primarily by high-cost specialty medications. Some level-funded setups allow the employer to utilize an independent Pharmacy Benefit Manager (PBM) rather than relying on the TPA’s default pharmacy network.
An independent, transparent PBM operates on a pass-through model. Instead of retaining the massive rebates offered by drug manufacturers (a standard practice for major carrier-owned PBMs), a transparent PBM passes 100% of the rebates back to the employer’s claims fund. This strategic carve-out can drastically reduce the severity of claims hitting the stop-loss attachment point and maximize the likelihood of a year-end surplus refund.
An employer cannot manage a level-funded plan on their own; they must hire a Third-Party Administrator (TPA). The TPA is the operational backbone of the plan. They process the medical claims, adjudicate bills against the plan document, issue employee ID cards, handle customer service calls, and coordinate the stop-loss reimbursements.
There are two primary ways TPAs function in the level-funded space:
Choosing the right TPA infrastructure is critical. A carrier ASO is smoother and feels more traditional, but an independent TPA provides aggressive, unbundled cost containment that frequently results in a larger year-end refund.
While ERISA preemption shields level-funded plans from state mandates, it introduces specific federal compliance responsibilities. Because the employer is legally the plan sponsor and fiduciary, they hold the ultimate responsibility for compliance, even if the TPA handles the day-to-day administration.
Under ERISA, the employer acts as a fiduciary. This legally binds the organization to operate the health plan exclusively in the best financial interest of the plan participants (the employees). The employer must ensure fees paid to TPAs and brokers are reasonable and that plan assets (the claims fund) are handled securely.
Level-funded employers are responsible for paying the Patient-Centered Outcomes Research Institute (PCORI) fee. This is a minor per-covered-life tax paid annually to the IRS using Form 720. In a fully insured plan, the carrier pays this invisibly. In a level-funded plan, the employer’s HR or finance team must calculate and submit it directly.
Applicable Large Employers (ALEs)—those with 50 or more full-time equivalent employees—must complete IRS Forms 1094-C and 1095-C to prove they offered minimum essential coverage that meets affordability standards. Because level-funded plans are self-insured, the employer must complete specific sections of the 1095-C (Part III) detailing exactly which months each employee and dependent was covered. A competent TPA will generate this data, but the liability for filing it accurately rests on the employer.
The renewal process for a level-funded plan operates differently than a fully insured renewal. If an employer has an excellent year with low claims, they will likely receive a refund and a flat or highly competitive renewal rate.
However, if the group has a catastrophic year—for instance, an employee suffers a severe heart attack and incurs $400,000 in claims—the stop-loss carrier will take a loss. At renewal, the carrier must adjust for this ongoing risk. They may do this in two ways:
Lasering transfers severe liability back to the employer. A well-negotiated level-funded contract secured by an experienced benefits consultant will include a “no new laser” provision, guaranteeing the carrier cannot implement mid-year or renewal lasers based on health events that occurred during the contract period.
For a Utah business examining its enterprise health insurance options, level-funding represents a pivotal shift from being a passive consumer of insurance to an active manager of healthcare risk.
If your organization has a generally healthy workforce, consistent cash flow, and a desire to actually see the data driving your annual rate increases, level-funding is the logical next step. It offers the exact mechanism needed to escape the community-rated pools, bypass restrictive state mandates via ERISA, and legally recapture the profit margins that traditional insurance carriers typically keep for themselves.
However, it requires an HR and executive team willing to engage with the mechanics of their plan, review monthly claims data, and partner with a TPA to strategically manage their workforce’s health. For those willing to take on that localized risk, level-funding offers the most reliable bridge to long-term cost containment available in the commercial market today.
Speak with a licensed advisor to determine if your workforce matches the profile for a level-funded arrangement.
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