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.
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.
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.
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.
|
Health plan type |
Level-funded |
Self-funded |
|
Cost structure |
Level-funded health plans offer predictable monthly costs. Employers pay a fixed monthly rate that covers both stop-loss insurance costs and potential medical claims. |
Self-funded health plans involve paying for medical claims as they occur. This can lead to fluctuating monthly healthcare expenses. |
|
Cash flow |
Level-funded plans are often easier on cash flow because costs are fixed, and employers can budget for them in advance. |
Employers with self-funded plans might need to set aside more money for unexpected claims, which can impact their cash flow. |
|
Risk management |
In level-funded plans, the employer only assumes financial risk up to a specific threshold. Once that threshold is reached, the risk is assumed by the stop-loss insurance carrier. This helps protect employers from high claims. |
With self-funded plans, employers assume all financial responsibility for employee health claims. This can potentially lead to higher costs during bad claim years. |
|
Regulatory compliance |
Level-funded plans are typically considered fully insured for regulatory purposes. They must comply with state insurance regulations. |
Self-funded plans are subject to federal regulations under the Employee Retirement Income Security Act of 1974 (ERISA). This may involve more complex compliance requirements. |
|
Claims and plan administration |
Level-funded plans often come with built-in administrative services and support from the insurance carrier, simplifying claims processing for employers. However, this is only when an employer has an ASO contract with a carrier. Otherwise, they’ll need to hire a TPA. |
Self-funded plans may necessitate hiring TPAs for claims management, which can add cost and complexity. |
|
Plan customization |
Level-funded plans may offer less control over plan design due to preset options from an insurance provider. |
Employers often have more flexibility in plan design under a self-funded model. They can tailor health coverage to meet the specific needs of their workforce. |
|
Tax benefits |
Level-funded plan premiums may not offer tax benefits. |
Self-funded plans can provide certain tax advantages since employers can exclude claims payments from payroll taxes. |
|
Employee coverage |
Level-funded plans may provide a wider array of insurance products and benefits, making it easier to attract and retain employees. |
Self-funded plans might seem riskier to employees. But they can provide specific advantages that cater to their unique needs. |
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:
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:
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.