Level Funding vs Self-Funding: Which is Right for Your Business?
Level funding vs self-funding is a critical decision for small and mid-sized employers looking for cost-effective, flexible health insurance solutions. Here’s the gist if you need a quick comparison:
| Feature | Level Funding | Self-Funding |
|---|---|---|
| Monthly Payments | Fixed, predictable payments | Variable, based on actual claims |
| Financial Risk | Limited risk, protected by stop-loss insurance | Full risk exposure, mitigated by stop-loss |
| Cost Savings | Potential refunds if claims lower than expected | Direct savings realized from lower claims |
| Administrative Effort | Moderate | Higher |
| Best suited for | Small to medium-sized employers | Medium to large employers |
Choosing between these two funding models comes down to your company’s size, risk tolerance, and financial stability. Understanding the differences will help you secure affordable benefits for your team without unexpected financial surprises.
I’m Les Perlson, a Partner at NPA Benefits with over 40 years of experience in the health insurance industry, specializing in innovative funding strategies including level funding vs self-funding. In this guide, I’ll walk you through both models clearly and simply, helping you choose the best path.
Level funding vs self-funding terms you need:
– self funded insurance meaning health insurance
– self funded vs level funded
Understanding Level-Funded Health Plans
Level-funded health plans have become the rising star in recent years, especially for small to mid-sized businesses looking for better ways to manage rising healthcare costs. According to a Kaiser Family Foundation (KFF) survey, the popularity of level-funded plans among employers with fewer than 200 workers jumped dramatically—from 13% in 2020 to a whopping 42% in 2021, and that strong momentum has continued as we move toward 2025. Clearly, something about this hybrid model is resonating with employers.
But what exactly is a level-funded health plan? Think of it as the perfect “middle child” between a fully insured health plan and a self-funded plan. It’s often described as a “self-funded plan with training wheels,” giving businesses a taste of self-funding without all the additional risk. Level funding combines predictable budgeting with the potential to save money if claims come in lower than expected.
With level-funded plans, employers pay fixed monthly payments that cover three main elements: a claims fund to cover employee healthcare expenses, stop-loss insurance to protect against unusually high claims, and administrative fees for managing and processing the plan. Because your monthly costs are set, these plans offer valuable budget certainty—a huge plus for small and mid-sized businesses.
In simple terms: if your employees stay healthier than expected over the year, there could be money left over in your claims fund. And here’s the sweet part: you could get a portion of that unused money back as a refund. Who doesn’t love a refund?
As Mark Mixer, CEO of a health plan company, says, “Any incremental savings can up the ante as to what benefits the employer is able to provide to its employees.” In other words, businesses can reinvest those savings to improve employee benefits and attract top talent. That’s why level-funded plans have become so appealing for businesses struggling with expensive traditional fully insured plans—but that aren’t quite ready to go all-in on self-funding.
How Level-Funded Plans Work
While level-funded plans might sound intimidating, they’re actually pretty easy to understand once you break them down. Here’s how they typically operate:
First, the insurance carrier takes a look at your employees’ past health records and claims history through a process called underwriting. They use this data to estimate next year’s healthcare costs and set your fixed monthly payments. Those monthly payments are then split into three buckets: about 60-70% goes to a dedicated claims fund, 15-20% covers stop-loss insurance premiums, and the remaining 10-15% pays for administrative fees.
Throughout the year, as your employees go to the doctor, get medical care, or pick up prescriptions, their claims are paid directly from the claims fund. If a single claim or the group’s total claims rise above pre-set limits, then your stop-loss insurance kicks in to protect you from financial surprises.
At the end of the plan year, the carrier checks to see how actual claims compared to the original estimates. If your claims come in lower than projected, you’ll receive a nice refund of a portion of the unused claims fund—usually around 40-50% of that surplus. Sounds good, right?
But here’s the flip side: renewal rates can jump if your claims are higher than expected. While level-funded plans offer predictable monthly payments, a tough claims year could mean renewal rate hikes of 35% or even higher. That’s why it’s important to choose a funding strategy (whether level funding vs self-funding) that matches your comfort level with risk.
It’s also worth noting that, from a compliance standpoint, level-funded plans are treated like self-funded plans. This means you’ll need to stay on top of specific regulatory requirements like PCORI fee reporting (due by July 31 each year), ACA employer mandate returns, COBRA premiums calculated differently than fully insured plans, Section 105(h) nondiscrimination testing, and RxDC reporting (due by June 1). While these compliance tasks might sound a bit overwhelming, with the right partner (like our friendly team here at NPA Benefits), they’re completely doable.
Joe Meyer, senior vice president of sales and marketing at a third-party administrator, sums it up nicely: “Level-funding provides a viable bridge option.” It’s a stepping stone that lets smaller employers ease their way from fully insured plans toward the flexibility and potential savings of self-funding—without diving straight into the deep end.
Want to dive even deeper into the advantages and disadvantages? Check out our handy guide on Advantages and Disadvantages of Offering a Level-Funded Group Health Plan.
Understanding Self-Funded Health Plans
Self-funded health plans take a more direct, hands-on approach to financing employee healthcare benefits. Instead of paying an insurance carrier to take on the risk, your company steps into the driver’s seat. You assume financial responsibility for paying employee health claims directly from your own pocket. It’s a bit like being your own insurance company.
This approach is quite popular—about 65% of covered workers across America are enrolled in self-funded plans. But there’s a clear pattern: these plans are much more common (83%) in large firms with deeper financial resources. It makes sense when you think about it—bigger companies can spread the risk across more employees.
The beauty of level funding vs self-funding becomes clearer when you understand the core principle behind self-funding: why pay predetermined premiums that might be higher than your actual healthcare costs? Instead, you pay for claims as they happen. This cuts out the middleman’s profit margin and risk charges that are typically baked into traditional insurance premiums.
When your employees stay healthy and claims run lower than expected, you get to keep the savings. No insurance company is pocketing that money—it stays with your business.
Large organizations love self-funding because they can leverage their size to spread risk across many employees. The numbers tell the story: while 83% of covered workers in large firms are enrolled in self-funded health plans, only about 20% of covered workers at small organizations participate in these arrangements.
What makes self-funding so attractive is the combination of flexibility and potential savings. Without an insurance carrier’s one-size-fits-all approach, you can tailor your health benefits to match your workforce’s specific needs. Want to add coverage for a particular therapy that matters to your team? You can do that. Need to adjust deductibles based on employee feedback? That’s your call.
Plus, you gain access to detailed claims data—information that traditional insurers often keep close to the vest. This treasure trove of data lets you spot trends, identify cost drivers, and implement targeted wellness programs that actually address your employees’ specific health challenges.
How Self-Funded Plans Work
Self-funded plans operate on a pay-as-you-go model that gives you more control but also requires more active management. Here’s how they typically work:
Unlike level-funded plans with their predictable monthly payments, self-funded plans involve variable expenses that change month to month based on your employees’ actual healthcare needs. Your finance team might love the potential savings, but they’ll need to prepare for this variability in cash flow.
You’ll establish a dedicated fund or account specifically for paying employee healthcare claims as they occur. Some months might be quiet, while others could see a spike in expenses if several employees need significant care at once.
Most companies don’t handle all this alone—they partner with Third-Party Administrators (TPAs) who manage the day-to-day details. These specialists process claims, answer employee questions, make sure you’re compliant with regulations, and often negotiate better rates with healthcare providers. They’re essential partners in making self-funding work smoothly.
The biggest concern with self-funding is the risk of catastrophic claims. What happens if someone on your plan faces a million-dollar medical crisis? That’s where stop-loss insurance comes in—it’s your safety net. This coverage comes in two forms:
- Individual stop-loss (sometimes called specific stop-loss) caps your liability for any single employee or dependent
- Aggregate stop-loss limits your total claims exposure for the entire plan
With self-funding, you gain remarkable flexibility in plan design. You decide the deductibles, copays, covered services, and provider networks. This allows you to craft benefits that truly reflect your company’s values and your employees’ needs.
Smart employers also establish a claims reserve fund to account for incurred but not reported (IBNR) claims—those medical services that have happened but haven’t been billed yet. This reserve helps smooth out cash flow fluctuations and ensures you’re prepared for delayed claims.
On the regulatory front, self-funded plans fall primarily under the Employee Retirement Income Security Act (ERISA), which preempts most state insurance regulations but brings its own compliance requirements. You’ll need to stay on top of these federal regulations.
The financial structure of self-funded plans differs dramatically from level-funded arrangements. In self-funding, only about 15% of your insurance expense is fixed (mainly administrative fees and stop-loss premiums), while the remaining 85% is variable (actual claims). This creates both opportunity and risk—when claims run low, you immediately benefit from the savings. But when claims spike, you need adequate cash reserves to cover costs up to your stop-loss threshold.
As one industry expert puts it, “A large claim early in the plan year could potentially deplete an entire annual budget” in a self-funded arrangement without proper stop-loss protection. That’s why careful planning and appropriate stop-loss coverage are essential components of any successful self-funded strategy.
Level Funding vs Self-Funding: Key Differences
When you’re weighing level funding vs self-funding options for your company’s health plan, you’re really looking at two distinctly different approaches to managing healthcare costs. Each comes with its own set of trade-offs that can significantly impact your bottom line, cash flow, and administrative workload.
Think of level funding as wearing a life jacket while swimming in the financial waters of healthcare costs. You’ll pay the same amount each month, regardless of whether your employees file $100 or $100,000 in claims. Self-funding, on the other hand, is more like swimming without that life jacket – you might move more freely and save money, but you’ll need to be a strong swimmer to handle the waves of variable costs that come your way.
Here’s how these approaches stack up against each other:
| Feature | Level Funding | Self-Funding |
|---|---|---|
| Payment Structure | Fixed monthly payments regardless of actual claims | Variable payments based on actual claims as they occur |
| Financial Risk | Limited by stop-loss insurance built into the plan | Full risk up to stop-loss thresholds |
| Cash Flow Impact | Predictable and stable | Potentially volatile with monthly fluctuations |
| Refund Potential | Partial refund (typically 40-50%) if claims are lower than funded amount | Full retention of unused claim funds |
| Renewal Process | Rates may increase significantly (35%+) if claims are high | More flexible renewal options based on claims experience |
| Data Transparency | Some reporting but often limited | Comprehensive claims data access |
| Plan Design | Some flexibility but typically with predetermined options | Complete flexibility to customize all plan elements |
| Administrative Burden | Moderate, with carrier handling most functions | Higher, requiring more employer involvement |
| Compliance Requirements | Subject to ERISA, ACA reporting, PCORI fees, etc. | Subject to ERISA, ACA reporting, PCORI fees, etc. |
| Best Suited For | Small to mid-sized employers (3-199 employees) | Mid-sized to large employers (200+ employees) |
Level funding has been gaining serious traction in recent years. In fact, a 2022 survey found that 38% of small firms now offer a level-funded plan – a remarkable jump from just 13% in 2020, and that upward trend is expected to remain strong as we head into 2025. That nearly 200% growth shows just how appealing this middle-ground option has become for smaller employers looking for alternatives to traditional insurance.
Risk and Financial Exposure in Level Funding vs Self-Funding
The biggest difference between these two funding models comes down to risk – how much of it you’re willing to shoulder as an employer.
With level funding, you’re essentially putting guardrails around your financial exposure. Your monthly payment includes premiums for stop-loss insurance that protects you if an individual employee has extremely high medical costs or if your total claims exceed expectations. This creates a ceiling on what you’ll pay, giving you predictable costs month after month.
As one of our clients recently told me, “Level funding lets me sleep at night. I know exactly what’s coming out of our account each month, no surprises.” This peace of mind is invaluable for many small business owners.
That said, level funding isn’t completely risk-free. If your employees have a particularly unhealthy year with lots of claims, you could face a steep renewal increase. We’ve seen some clients hit with 35%+ rate hikes after a high-claim year, which can throw a serious wrench in your budget planning.
In contrast, self-funding means embracing more financial uncertainty. You’re paying claims as they happen, which means costs can swing dramatically from month to month. A single employee with a serious medical condition early in the plan year could potentially blow through your healthcare budget faster than you anticipated.
While self-funded plans do include stop-loss protection, you’re still responsible for claims up to that stop-loss threshold. Typical aggregate stop-loss kicks in at 110% to 125% of expected claims – meaning you need to be prepared to pay up to 25% more than you budgeted before that safety net catches you.
Both funding models are technically considered self-funded for compliance purposes, which means you’ll need to steer complex requirements like ERISA fiduciary responsibilities, ACA reporting, PCORI fees, nondiscrimination testing, and RxDC reporting. Failing to meet these obligations can result in penalties – yet another risk factor to consider when making your choice.
Cost Predictability and Cash Flow in Level Funding vs Self-Funding
For many businesses – especially smaller ones – cash flow predictability can be just as important as the total annual cost of healthcare.
Level-funded plans shine in this department. Your monthly payment stays consistent throughout the year, making budgeting straightforward. Whether January is a heavy claims month or a light one doesn’t affect what comes out of your account.
As one of our small business clients put it: “With level funding, I can forecast my healthcare expenses down to the penny for the entire year. That predictability helps me manage everything from staffing decisions to equipment purchases.”
The level-funded model even includes mechanisms where the stop-loss insurance can function like a loan to cover monthly deficits if actual claims exceed estimates. This smooths out any potential cash flow issues, with everything reconciled at year-end.
Self-funded plans, by contrast, operate on a pay-as-you-go basis. Your monthly costs will vary – sometimes dramatically – based on the actual healthcare services your employees use. This variability can create real challenges, particularly if several large claims hit in close succession.
I remember one client who switched to self-funding and saw their monthly healthcare costs swing from $45,000 one month to $112,000 the next when two employees needed expensive procedures. While they had budgeted for this possibility, it still created temporary cash flow stress.
The flip side is that self-funding offers immediate financial benefits when claims are low. Unlike level funding, where you might get a refund at year-end if claims are lower than expected, self-funded employers realize these savings in real-time through reduced monthly expenditures.
Industry analysis shows that in self-funded plans, about 85% of costs are variable (claims-based), while only 15% are fixed (administrative fees and stop-loss premiums). This cost structure offers significant potential for savings but requires careful cash flow management and healthy reserves.
Plan Design and Flexibility in Level Funding vs Self-Funding
When it comes to tailoring your health plan to fit your employees’ specific needs, these two funding models offer very different levels of control.
Self-funded plans are the clear winner in the flexibility department. They give you the freedom to design virtually every aspect of your health benefits from the ground up. You can customize covered services, set specific deductibles and copays, design your own drug formularies, select provider networks, implement innovative cost-containment strategies, and adjust benefits based on what your employees actually need and use.
This flexibility allows you to create a truly customized benefit package rather than being limited to off-the-shelf insurance products. Plus, self-funded employers get detailed claims data, enabling them to make informed decisions about plan adjustments that can improve both cost-effectiveness and employee satisfaction.
One of our manufacturing clients used this flexibility to create a plan that covered chiropractic care at 100% after noticing that workplace injuries were their biggest claims driver. This targeted approach reduced their overall healthcare spending by 12% the following year.
Level-funded plans, while more flexible than traditional fully insured options, offer fewer customization opportunities. They typically come with predetermined plan designs and some room for modification, but you won’t have the ground-up customization that’s possible with self-funding.
As one of our consultants often explains to clients: “With level funding, you’re choosing from a menu of plan designs rather than creating your own from scratch.” The carrier or administrator usually offers several options, but comprehensive customization is less common.
This limitation exists partly because level-funded plans rely on the carrier’s actuarial projections to set those fixed monthly rates. Highly customized plans make accurate projections more challenging, potentially increasing the carrier’s risk.
That said, level-funded plans still offer advantages over fully insured options, including some ability to select from multiple plan designs, more transparency into claims data, potential for midyear adjustments based on utilization, and the ability to implement certain wellness and cost-containment programs.
For many small to mid-sized employers we work with at NPA Benefits, level funding strikes that sweet spot between having some customization options and keeping things administratively manageable. As one client told me, “We get enough flexibility to make the plan work for our employees without needing to become healthcare experts ourselves.”
When it comes down to it, choosing between level funding vs self-funding isn’t just about the numbers – it’s about finding the right balance of predictability, risk, and control for your unique business situation.
Pros and Cons of Level-Funded and Self-Funded Plans
When deciding between level funding vs self-funding, understanding the pros and cons is essential. Both options offer meaningful benefits, but they come with some potential problems as well. Let’s walk through these carefully and clearly, helping you find the perfect fit for your business and employees.
Pros and Cons of Level-Funded Plans
One of the biggest perks of a level-funded plan is the predictable monthly cost. Your payments are fixed for the entire year, making budgeting simple—no surprises. This stability is particularly attractive for small and mid-sized businesses that prefer certainty over unpredictability. Another great advantage is the potential for refunds at the end of the plan year. If actual claims are lower than anticipated, you can see some of your money returned—typically around 40-50% of unused funds. It’s a nice bonus for keeping your team healthy and happy.
Level-funded plans also offer lower financial risk thanks to built-in stop-loss insurance. This protection keeps your financial exposure capped, preventing one or two big medical events from derailing your finances. You’ll also enjoy access to some claims data, which can let you spot cost trends and find ways to encourage better health outcomes among your workers.
Since level-funded plans are considered self-funded under ERISA, they’re also exempt from many state insurance regulations and premium taxes, potentially reducing your overall costs. Plus, level-funding can be a gentle first step into self-funding if you’re transitioning away from fully insured plans.
That said, there are a few potential drawbacks to consider. One of the most significant is the possibility of high renewal rates if your group has high claims in a given year. In some cases, renewal increases can spike dramatically—over 35%—which can wipe out previous savings and strain your budget.
Another tricky point is the limited refund structure. Typically, refunds come as credits towards future premiums rather than cash, and often you’re required to renew with the same carrier to receive these funds. Industry expert Rob Hamilton warns: “When you choose a level-funded plan and want to switch carriers at renewal, you won’t see your refund, even if you didn’t spend all your claims money.”
Additionally, you’ll face extra compliance requirements. Unlike traditional fully insured plans, level-funded arrangements involve obligations such as PCORI fee reporting, ACA reporting, COBRA administration differences, and Section 105(h) nondiscrimination testing. Lastly, keep in mind the limited plan customization. While you’ll still have more flexibility than a typical fully insured plan, level-funded options aren’t as fully customizable as self-funded solutions.
Pros and Cons of Self-Funded Plans
On the other hand, self-funded plans provide some impressive upsides—especially for businesses ready to accept more responsibility in exchange for greater control. The biggest attraction is no doubt the maximum plan design flexibility. Self-funding lets you customize your health benefits exactly how you like, covering exactly what your team needs at a price you control.
Another standout benefit is direct and immediate cost savings. When claims are lower than expected, you keep every dollar saved, right from day one. There’s no waiting for refunds or credits down the road. Plus, without paying profits to an insurance carrier like you would in a fully insured plan, your potential for savings can be significant.
Complete data transparency is another big draw. Self-funded plans put you in the driver’s seat, offering full access to claims data. This means you can pinpoint exactly where your healthcare dollars are going and make informed decisions about plan improvements, wellness programs, and cost-saving measures.
In months when claims are low, your business will see a cash flow advantage immediately. Instead of paying fixed premiums, you’ll simply pay for claims as they occur. You’ll also gain regulatory consistency, as self-funded plans primarily fall under ERISA, shielding them from many varying state insurance mandates. For multi-state businesses, this can greatly simplify compliance efforts.
But there are significant challenges to keep in mind with self-funding. The most notable is the higher financial risk. Since you pay claims directly, costs can fluctuate dramatically month-to-month. If several large claims occur early in the year, you could face a substantial financial impact, requiring careful budgeting and strong cash reserves.
Indeed, maintaining sufficient financial reserves is essential. You’ll need to hold enough money aside to cover unexpected spikes in claims and incurred-but-not-reported (IBNR) expenses. There’s also a higher administrative burden, as you’ll have more hands-on responsibilities—like selecting third-party administrators (TPAs), negotiating stop-loss insurance, pharmacy management, and compliance oversight.
Speaking of compliance, self-funding introduces greater compliance complexity. While you avoid state insurance mandates, you’ll still have to follow federal regulations, including ERISA fiduciary obligations, ACA reporting, HIPAA privacy and security, and Section 105(h) nondiscrimination testing.
Finally, businesses that experience a bad claims year might face challenges at renewal. Securing affordable stop-loss insurance after high claims can become difficult and expensive, sometimes forcing smaller businesses back into fully insured options. One employer shared their experience: “We experienced unexpectedly high claims, resulting in a prohibitively expensive stop-loss renewal and a subsequent return to a fully insured plan.”
Understanding these advantages and drawbacks thoroughly will help you decide with confidence whether level funding vs self-funding is right for your team.
How to Choose Between Level Funding and Self-Funding
Deciding between level funding vs self-funding isn’t just a financial decision—it’s about finding the right fit for your company’s unique situation. Let’s walk through how to make this important choice with confidence.
When I sit down with clients to discuss their options, I always start by looking at the full picture of their business. Your company’s size plays a huge role in which model makes sense. If you’re running a smaller operation with fewer than 100-200 employees, level funding typically offers a much more comfortable entry point. The predictable monthly costs create a safety net that many small business owners appreciate.
On the other hand, if you’re managing a larger organization with 200+ employees, self-funding might be the better path. With a larger employee base, you can spread the risk more effectively and potentially realize greater savings. The numbers tell the story: about 83% of workers in large companies are enrolled in self-funded plans, while only about 20% in smaller organizations go this route.
Your workforce demographics matter tremendously too. Do you have a relatively young, healthy team? You might benefit more from self-funding or level funding than a fully insured plan. But if several employees have known health conditions that require ongoing care, the predictability of level funding could be your best friend.
Financial Readiness and Risk Comfort Level
Be honest about your company’s financial situation and your personal comfort with risk. Self-funding requires stronger cash reserves and the ability to weather some potentially stormy months if several large claims hit at once.
I remember working with a manufacturing client who was drawn to self-funding’s potential savings but ultimately wasn’t comfortable with the financial exposure. We opted for level funding as a middle ground, and they were relieved when an unexpected series of claims occurred the following quarter. The predictable payments had protected them from a significant cash flow challenge.
As Joe Meyer, a senior vice president at a third-party administrator, wisely puts it: “Level-funding provides a viable bridge option” for employers who want some self-funding benefits without the full financial exposure.
Control vs. Simplicity
How much control do you want over your plan’s design? If customizing every aspect of your health benefits is important to you—from specific coverage details to provider networks—self-funding gives you the freedom to build exactly what your team needs.
With level funding, you’ll have more options than a fully insured plan but less flexibility than true self-funding. Most carriers offer a menu of plan designs rather than complete customization. For many of my clients, this middle ground provides enough options without overwhelming them with decisions.
Administrative Resources
Be realistic about your team’s bandwidth and expertise. Self-funded plans require more hands-on management, from analyzing claims data to ensuring compliance with complex regulations like ERISA and ACA reporting requirements.
If your HR department is already stretched thin, level funding might be more practical since the carrier handles many administrative functions. One client with a small HR team of just two people found level funding gave them the benefits they wanted without overwhelming their staff with new responsibilities.
Starting Small and Scaling Up
Many of my clients find success by starting with level funding as a stepping stone. Think of it as “self-funding with training wheels,” allowing you to get comfortable with the concepts before potentially transitioning to full self-funding as your company grows.
This gradual approach lets you build experience with claims funding and access more detailed data about your employees’ healthcare usage patterns. You’ll develop the knowledge and systems needed for successful self-funding down the road, if that becomes your goal.
Alan Silver, senior director at a prominent consulting firm, offers this practical advice: “You want to go with the best available carrier for level-funded plans, and that may not be your current carrier.” Don’t limit yourself to your existing insurance relationships—explore all your options.
At NPA Benefits, we’ve guided hundreds of employers through this decision process. What stands out most is that there’s no one-size-fits-all answer. The right choice depends on your specific circumstances, goals, and comfort level.
A thoughtful evaluation of these factors—preferably with guidance from an experienced benefits advisor—will help you determine whether level funding vs self-funding is the right approach for providing quality healthcare benefits while managing costs effectively.
Frequently Asked Questions about Level Funding vs Self-Funding
When exploring health insurance options for your business, questions inevitably arise about the specifics of level funding vs self-funding. Let’s tackle some of the most common questions I hear from employers considering these options.
Is a Level-Funded Plan Fully Insured?
Despite those consistent monthly payments that might feel like a traditional insurance premium, level-funded plans are not fully insured. Surprise! They actually fall into the self-funded category from a technical and regulatory standpoint.
Think of level funding as wearing a self-funding costume with extra padding. You’re still assuming some financial risk as the employer, but you’ve got that built-in stop-loss insurance as your safety net when claims climb unexpectedly high.
This distinction matters tremendously for compliance purposes. Level-funded plans march to the beat of ERISA regulations rather than state insurance laws. This means you’ll escape state premium taxes and certain state mandates (hooray for savings!), but you’ll need to dance with federal requirements instead:
- Those ERISA fiduciary responsibilities (yes, you become a plan fiduciary)
- ACA reporting obligations (those fun annual forms)
- PCORI fee payments (mark your calendar for July 31 each year)
- Section 105(h) nondiscrimination testing (making sure your plan doesn’t favor highly compensated employees)
- RxDC reporting (tracking prescription drug costs)
I’ve seen many employers get caught off guard by this regulatory shift. As one client told me after transitioning: “I wish someone had given me a compliance checklist before we switched!” Consider this your friendly heads-up.
Do Self-Funded Plans Have Deductibles?
Absolutely! Self-funded plans typically include deductibles just like their fully insured cousins. The beautiful difference is your freedom to design these deductibles exactly as you see fit.
With self-funding, you’re the architect of your plan. Want a $500 deductible for your executive team and a $1,500 deductible for everyone else? You can do that (though you’ll need to pass nondiscrimination testing). Prefer a high-deductible health plan compatible with HSAs? That works too.
Your self-funded plan can include all the familiar cost-sharing elements:
– Annual deductibles (both individual and family)
– Copayments for doctor visits, prescriptions, and other services
– Coinsurance percentages
– Out-of-pocket maximums to protect employees from catastrophic costs
One important distinction that sometimes causes confusion: your employees’ deductibles are completely separate from your stop-loss insurance thresholds. The deductible is what your employees pay before the plan starts covering costs, while stop-loss is what protects you (the employer) from claims that exceed certain thresholds.
As one of my clients who recently switched to self-funding shared: “We actually lowered our employees’ deductibles while still saving money overall. It was a win-win that we couldn’t achieve with our fully insured plan.”
What Types of Businesses Benefit Most from Each Plan?
Not all funding models fit all businesses. Let’s look at which organizations typically thrive with each approach.
Level-funded plans have become the darling of small to mid-sized businesses with around 3-199 employees. The numbers tell the story – 38% of small firms offered level-funded plans in 2022, up dramatically from just 13% in 2020, and that adoption is expected to continue into 2025. Why such growth? These businesses love the predictable monthly costs while still getting a shot at potential savings.
Growing companies and startups particularly benefit from level funding’s budget certainty. When you’re scaling rapidly, the last thing you need is wildly fluctuating healthcare costs throwing off your financial projections.
Level funding also makes sense for businesses with limited HR resources. You get many self-funding benefits without needing a dedicated benefits specialist to manage claims and provider relationships. The carrier handles most of the heavy lifting.
I often recommend level funding as training wheels for employers looking to eventually transition to full self-funding. It lets you dip your toes in the self-funding waters without diving into the deep end immediately.
On the flip side, self-funded plans typically shine for medium to large employers with 200+ employees. With a larger employee base, you can better spread risk across your population. It’s no wonder 83% of covered workers in large firms are enrolled in self-funded plans.
Financially stable organizations with strong cash reserves make ideal self-funding candidates. You need that financial cushion to handle those months when multiple big claims hit at once.
Self-funding is also perfect for control freaks (I say that lovingly!). If you want to customize every aspect of your health benefits – from network design to covered procedures to wellness incentives – self-funding gives you the keys to the kingdom.
Companies with sophisticated HR and benefits teams often prefer self-funding because they have the expertise to maximize its advantages. Your benefits team can analyze claims data, negotiate with providers, and fine-tune the plan based on utilization patterns.
Multi-state employers particularly appreciate self-funding’s consistent regulatory environment under ERISA, rather than navigating different insurance regulations in each state.
As Donovan Pyle, CEO of a health consulting firm, wisely cautions: not all level-funded products are created equal, and it’s crucial to find one that aligns with your specific needs. At NPA Benefits, we’ve helped hundreds of employers find the perfect fit for their unique situation.
The right funding model for your business isn’t just about size or finances – it’s about finding the approach that aligns with your company culture, risk tolerance, and long-term benefits strategy. Sometimes the best way to decide is to sit down with an expert who can walk you through the real-world implications for your specific business.
Conclusion
The decision between level funding vs self-funding represents a critical strategic choice for employers seeking to balance cost control, risk management, and benefit flexibility. Both approaches offer distinct advantages over traditional fully insured plans, but their suitability varies based on your organization’s specific circumstances.
When we look at the big picture, level funding gives you that middle-ground approach that many businesses find comforting. You’ll enjoy predictable monthly payments that make budgeting straightforward, and you won’t lose sleep over unexpected claims thanks to the built-in stop-loss coverage. If your team stays healthier than expected, you might even see some money back at the end of the year in the form of refunds. The administrative load is manageable too, making this option particularly attractive if you’re running a small to mid-sized company without a dedicated benefits department.
On the other hand, self-funding puts you in the driver’s seat with maximum flexibility and potential for greater savings. You’ll have complete control over your plan design – from deductibles to covered services, everything can be customized to your workforce’s needs. When claims run lower than expected, you’ll see those savings immediately rather than waiting for year-end adjustments. You’ll also gain valuable insights through comprehensive access to claims data, helping you make smarter decisions about your benefits strategy. Of course, this approach does mean taking on greater financial responsibility and risk, which is why it tends to work best for larger, financially stable organizations.
It’s no wonder alternatives to traditional insurance are gaining traction. With health insurance costs projected to increase by about 7% in 2025, employers are actively seeking more cost-effective solutions. The dramatic growth in level-funded adoption – from 13% in 2020 to 42% in 2021 – has continued to draw attention as we enter 2025, showing just how appealing this hybrid model can be for smaller employers looking to control costs without taking on too much risk.
For many organizations, the journey from fully insured to self-funded arrangements isn’t an overnight transition. This is where level funding really shines as a stepping stone. As Joe Meyer so aptly puts it, “Level-funding provides a viable bridge option” that allows you to get comfortable with claims funding concepts before diving into the deeper waters of traditional self-funding.
Here at NPA Benefits, we’ve guided countless employers through these decisions. We understand that no two organizations are exactly alike, which is why we take the time to understand your specific needs, risk tolerance, and financial objectives before recommending either level-funded or self-funded arrangements.
Your choice of funding model affects more than just your bottom line – it impacts your ability to provide competitive benefits that attract and retain top talent. According to a 2025 Employee Benefits Survey, an overwhelming 92% of employees rated health benefits as important, and 81% considered an employer’s benefits package a major factor in job acceptance. In today’s competitive talent market, getting your health benefits strategy right isn’t just a nice-to-have; it’s essential.
Whether level funding vs self-funding is right for your organization ultimately depends on a thoughtful analysis of your specific circumstances. By understanding the key differences we’ve outlined and partnering with experienced advisors, you can make an informed decision that positions your healthcare strategy for success in the years ahead.
Ready to explore whether level funding or self-funding is right for your organization? Contact us at NPA Benefits to discuss your options and develop a custom strategy that meets your specific needs.
