Employers evaluating how to fund a group health plan have historically chosen between two models: a fully insured plan, in which a carrier assumes the financial risk in exchange for a fixed premium, or a self-insured plan, in which the employer assumes that risk directly and pays claims as they occur. Level funding has emerged as a third option that bridges the two and borrows features from both. It has become common among small and midsize employers in particular; according to KFF’s 2026 Employer Health Benefits Survey, 38% of covered workers at firms with 10 to 199 employees are enrolled in a level funded plan.
This article explains what level funding is, how the arrangement works over the course of a plan year and what changes for an employer who adopts it.
What Is Level Funding?
A level funded health plan is a type of self-funded (or self-insured) plan. Rather than paying a premium to an insurance carrier that assumes the claims risk, the employer funds its own group’s claims, much as it would under traditional self-insurance. What distinguishes level funding is how that funding is structured and paid.
Instead of paying claims individually as they are processed throughout the year, which can create unpredictable monthly costs, an employer with a level funded plan pays a fixed, or “level,” amount each month to an insurance carrier or third-party administrator (TPA). That fixed fee is set for a 12-month period and is based largely on the health status and expected claims experience of the employer’s own group, rather than on a broader community rate. For compliance purposes, level funded plans are treated as self-funded plans.
How Is the Monthly Fee Built?
The level fee an employer pays each month is typically made up of three components:
- An estimated claims amount is the projected cost of the group’s health care claims for the year, calculated by the carrier or TPA based on factors such as the group’s size, demographics and health status.
- An administrative fee covers the carrier’s or TPA’s cost of administering the plan, including processing claims, handling billing and providing customer service to covered employees and their dependents.
- A stop-loss insurance premium protects the employer against claims that exceed what was estimated, which is addressed in more detail below.
Because the fee is fixed for the full plan year, an employer’s monthly health plan expense looks similar to what it would be under a fully insured plan, even though the underlying funding mechanism is closer to self-insurance.
How Do Claims and Funding Work?
Each month, the employer’s payment flows into a claims account that the carrier or TPA uses to pay the group’s medical claims as they are submitted throughout the year. From the employer’s perspective, this works much like a fully insured plan: the same amount is paid every month regardless of how claims activity fluctuates from one month to the next.
If claims in a given month, or cumulatively across the year, exceed a threshold set in the contract (known as the attachment point), stop-loss insurance begins covering the excess rather than the employer. Stop-loss coverage typically comes in two forms. Specific, or individual, stop-loss protects against a single catastrophic claim once it crosses a set dollar threshold. Aggregate stop-loss protects against the total claims across the whole group exceeding expectations, even if no single claim is unusually large. Together, these two forms of coverage are what allow a level funded plan to offer financial predictability similar to a fully insured plan, despite the employer technically bearing the claims risk.
At the end of the plan year, there is typically a runout period during which claims incurred during the year but not yet submitted or processed continue to be paid from the employer’s existing account, with no additional funding required. Once the runout period closes, the carrier or TPA determines whether a surplus remains in the claims account, so any refund typically arrives well after the plan year ends. If the group’s actual claims were lower than estimated and funded, the employer may be entitled to a refund of some or all of the surplus, depending on the specific contract terms. If claims exceeded the stop-loss attachment points, stop-loss insurance covers the excess, which limits the employer’s additional exposure for that plan year.
Compliance Considerations
Because level funded plans are treated as self-funded for compliance purposes, an employer moving from a fully insured plan to a level funded one takes on a different set of obligations than it had before. Consider the following:
- ACA health coverage reporting—Employers with level funded plans must file an annual information return with the IRS under Internal Revenue Code Section 6055, along with providing related statements to covered individuals. For employers who are not already filing under the separate Section 6056 requirement that applies to large employers, this is a new filing obligation. Level funded plans must comply with Affordable Care Act (ACA) rules that apply to all group health plans, such as dependent coverage to age 26, preventive care without cost sharing, and no lifetime or annual dollar limits on essential health benefits.
- PCORI fees—Self-funded plans, including level funded plans, are subject to the ACA’s Patient-Centered Outcomes Research Institute (PCORI) fee, which is based on the average number of covered lives under the plan. For plan years ending between Oct. 1, 2025, and Sept. 30, 2026, that fee is $3.84 per covered life and is adjusted annually by the IRS. It is reported annually on IRS Form 720 by July 31.
- Nondiscrimination rules—Self-funded plans, including level funded plans, are subject to nondiscrimination requirements under Internal Revenue Code Section 105(h) that do not apply to fully insured plans. In general, a plan that applies the same eligibility rules and benefits to all employees is unlikely to run into trouble under these rules, even if highly compensated employees use the plan more, although employers should confirm compliance with counsel or their advisor.
- ERISA’s use of plan assets—If an employer receives a surplus refund and employees contributed toward the monthly fee, such as through pre-tax payroll deductions, a portion of that refund is considered a plan asset under the Employee Retirement Income Security Act of 1974 (ERISA). Plan assets must be used exclusively for the benefit of plan participants and beneficiaries, not for the employer’s general business purposes, which affects how a refund can be used.
- HIPAA privacy and security rules—A level funded plan is a group health plan and must comply with the Health Insurance Portability and Accountability Act (HIPAA). Under a fully insured plan, the carrier typically handles most of these obligations, particularly when the employer receives only summary health information. Under a level funded plan, the employer, as plan sponsor, is responsible for ensuring that the plan maintains written privacy and security policies; provides participants with a notice of privacy practices; executes business associate agreements with vendors that handle protected health information (PHI) on its behalf, such as the TPA; and notifies affected individuals of a breach of unsecured PHI. If the employer receives PHI beyond summary health information and enrollment data, the plan documents must also be amended to limit how the employer may use PHI, including keeping plan administration separate from employment-related decisions.
At the same time, level funded plans are exempt from several requirements that apply to fully insured plans in the small group market. Specifically, level funded plans are not subject to the following requirements:
- Essential health benefits (EHB) package—Fully insured plans in the small group market must offer comprehensive health coverage, referred to as the EHB package.
- Community rating—Fully insured plans in the small group market are subject to a modified form of community rating.
- State insurance mandates—Fully insured plans must comply with applicable state insurance mandates, which require these plans to provide coverage for certain benefits, providers and individuals.
- State continuation coverage (“mini-COBRA”) laws—Fully insured plans must comply with state continuation coverage requirements, to the extent applicable to the employer.
- Taxes and fees—Insurance carriers are subject to certain taxes and fees under state and federal law, which they typically pass on to employers in the form of increased premiums.
Avoiding these requirements is part of what allows level funded plans to offer more flexibility in plan design, such as access to high deductible health plans (or HDHPs) compatible with health savings accounts, network-only options and traditional preferred provider organization (or PPO) designs.
Additional Features
Level funded plans typically provide employers with periodic utilization reports showing how the group is using its health benefits, such as emergency room visits, generic drug utilization and virtual care use. Because fully insured plans generally do not provide this level of detail, this is often a meaningful change for employers moving from one model to the other, and it gives employers information they can act on during the plan year rather than only after renewal.
Advantages and Disadvantages of Level Funding
Level funding combines features of fully insured and self-funded plans, which means it carries both benefits and trade-offs. Employers should weigh the following considerations against their size, workforce and tolerance for financial variability.
Consider the advantages of level funding;
- Predictable monthly costs—A fixed monthly fee allows employers to budget for health benefits much as they would under a fully insured plan.
- Protection from high claims—Specific and aggregate stop-loss coverage limits the employer’s exposure to catastrophic claims and to unexpectedly high claims across the group.
- Potential surplus refund—If the group’s claims are lower than projected, the employer may recover some or all of the surplus, depending on the contract terms.
- Pricing based on the group’s own experience—Because the fee reflects the group’s own expected claims rather than a community rate, employers with healthier workforces may pay less than they would for a comparable fully insured plan.
- Plan design flexibility—Exemption from several fully insured requirements gives employers more room to tailor benefits.
- Claims visibility—Utilization reports give employers data they can use to adjust their strategy during the plan year.
Conversely, consider the following disadvantages:
- Retained claims risk—The employer remains responsible for claims up to the stop-loss attachment points, which are often set close to the amount funded through the monthly fee, and a surplus refund is never guaranteed.
- Renewal variability—Because the fee is based on the group’s own claims experience, a year of high claims can lead to a substantially higher fee at renewal. Stop-loss carriers may also adjust terms at renewal, including by setting a higher attachment point for individuals with known high-cost conditions (sometimes called lasering).
- Underwriting requirements—Carriers and TPAs generally evaluate the group’s health status, and employers may need to provide health information to obtain a quote. Groups with higher expected claims may find fewer options or higher fees, and some may be declined altogether. Availability also varies by state, because some states restrict the stop-loss coverage that level funded plans rely on.
- Added compliance responsibilities—Employers take on obligations that a carrier typically handles under a fully insured plan, as described above.
- Contract complexity—Terms can vary meaningfully between carriers and TPAs, particularly around how a surplus is calculated and distributed. Some contracts, for example, pay out only a percentage of the surplus or require the employer to renew to receive it.
Which Employers Use Level Funding
Level funding is most common among small and midsize employers, generally those with 50-200 employees. These employers may find full self-funding impractical because of the claims volatility they would carry, and level funding offers access to many self-funding features with a more predictable monthly cost. Carriers often set limits on the maximum group size, which would prevent larger employers from using this structure.
Employers who may benefit most typically have a relatively healthy and stable workforce, expect claims to fall below the premium they would pay for a fully insured plan, want greater plan design flexibility and claims data, and have the financial capacity to absorb some variability, such as a higher fee at renewal after a high-claims year. Level funding may be a poorer fit for employers with significant expected high-cost claims or those that need strict cost certainty from year to year. Employers considering level funding should work with a broker to evaluate how the arrangement compares with their current plan.
Summary
Level funding is a self-funded health plan arrangement that gives employers the predictable, fixed monthly payment of a fully insured plan while retaining some of the cost-saving potential, design flexibility and claims visibility of self-insurance.
Level funding is a relatively new arrangement compared to fully insured and traditional self-insured plans, and contract terms can vary meaningfully from one carrier or TPA to another, particularly around how a claims surplus is calculated and distributed. Employers considering level funding should plan to review contract terms closely, ideally with the help of a broker, before entering into an agreement.
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This article is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice. © 2026 Zywave, Inc. All rights reserved.
