Level-funded vs. self-funded health plans

Small employers shopping for a health plan face the critical task of finding a policy that balances cost, coverage, and the well-being of their employees. While fully-insured policies have been the traditional option, rising premium costs have more employers turning to both level-funded and self-funded health plans. Each funding model has its advantages, but also presents challenges that can be hard to navigate—especially if you’re new to offering a health benefit.

In this article, we'll break down the key differences between these two popular types of health plans.

In this blog post, you'll learn the following:

• How self-funded and level-funded plans compare.
• The risks employers face when offering level-funded or self-funded plans.
• How an HRA offers the perks of a self-funded health plan without the complications or costs for employers.

What is a level-funded plan?

A level-funded health plan is a type of employer-sponsored health insurance that combines features of fully insured and self-funded plans. It provides a balance of predictability and flexibility. In a level-funded plan, the employer deposits a fixed monthly amount into a claims account and pays a monthly premium toward stop-loss insurance.

The money that the employer pays toward the claims account is used to cover employee healthcare claims throughout the year. If claims exceed the amount saved in the claims account, the employer’s stop-loss policy kicks in and takes care of the excess cost.

A level-funded plan allows employers to better manage their healthcare budgets while still sharing some financial risk with their stop-loss carrier. If the actual claims are lower than expected at the end of the plan year, the employer may receive a refund of unused funds. This makes it an attractive option for businesses that have a healthy workforce but still want to control costs if claim volume suddenly increases.

According to KFF¹, 33% of employees who work for a small business had coverage through a level-funded plan in 2024. Many employers who offer a level-funded plan work with a carrier under an ASO (administrative services only) contract. This is a deal between a company and a third party to manage employee benefits, with the company covering the costs for those benefits directly.

What is a self-funded plan?

A self-funded health plan, also known as a self-insured plan, is a type of health insurance arrangement where an employer assumes the total financial risk for providing health care benefits to its employees. Organizations cover medical costs instead of purchasing a fully insured plan from an insurance company, and they forgo the option of having a stop-loss policy.

In this model, the employer funds the health claims out-of-pocket as they're incurred. They often use a third-party administrator (TPA) to handle the claims processing and administrative tasks. This approach can save money and allow more flexibility in benefit design if your employees don’t have many medical expenses. But it also requires employers to maintain sufficient cash flow and reserves to cover unexpected, high-cost claims. For this reason, self-funded insurance plans are usually more common among larger companies that can handle the financial risks.

According to KFF, 20% of covered workers at small organizations were enrolled in self-insured health plans in 2024.

Level-funded vs. self-funded plans

Let's look at how level-funded and self-funded plans compare to help you make an informed decision that sets your organization up for success.

A self-funded plan without the hassle or financial risk

Self- and level-funded health plans are becoming more popular among small businesses, but they don’t come without risks. While traditional group health insurance may be out of reach for many small organizations, there’s another way to provide health coverage to your employees.

A stand-alone health reimbursement arrangement (HRA) provides the benefits of a self-insured health plan without the potential risks or administrative challenges. An HRA allows employers to pay employees back for their eligible medical expenses. This includes individual health insurance premiums. This way, you can help employees with their medical bills without having to purchase a group health plan for them. They enroll in the health insurance plan that works best for them and their families.

HRAs eliminate the risks of self-insuring because you have full control of your budget. You set a monthly allowance for your employees. Unused allowances roll over month-to-month until the end of the benefit year. You’ll never pay out more than this amount, giving you cost predictability. Plus, like a level-funded or self-funded plan, you keep any unused funds.

With an HRA, you can reimburse more than 200 employee healthcare costs, such as:

• Premiums for health, dental, and vision plans
• Preventive care
• Doctor visits
• Prescription drugs
• Over-the-counter medication
• Chiropractic care
• Mental health counseling

Offering a health benefit is the easiest way to have happier and healthier employees. According to our 2024 Employee Benefits Survey, 92% of employees rated health benefits as important. Additionally, 81% said an employer’s benefits package is an important factor in whether they accept a job. This means if you're not offering a health benefit, you're behind the competition.

While it may be easy for larger companies to offer health coverage, small to midsize businesses face more challenges because of costs. This is where HRAs come in handy. If a traditional group health plan is out of your reach, an HRA can help you support the health of your employees without jeopardizing the financial health of your company.

The two types of stand-alone HRAs are:

• The qualified small employer HRA (QSEHRA): The QSEHRA is only for employers with fewer than 50 full-time equivalent employees (FTEs). Employees must have an insurance policy that provides minimum essential coverage (MEC) to participate in the benefit. There are annual contribution limits with a QSEHRA.
• The individual coverage HRA (ICHRA): The ICHRA is for employers of all sizes. Employers can also vary allowances based on employee classes. There are no limits on employer contributions with an ICHRA. Employees must have their own individual insurance plans to participate in the benefit.

Conclusion

Selecting the right health plan involves more than just crunching the numbers. You need a clear understanding of how each option operates and what they offer. Level-funded plans provide a predictable budgeting approach with potential savings, while self-funded plans offer greater flexibility and control over healthcare spending.

An HRA offers the advantages of a self-funded health plan without the headache. With an HRA, it's easy to offer an employee health benefit that doesn't break the bank. If you want a happier and healthier workforce, schedule a call with a PeopleKeep HRA specialist to get started.

1. https://www.kff.org/report-section/ehbs-2024-summary-of-findings