What Are Level Funded Health Plans?

Level-funded health plans have emerged as a notable option for employer-sponsored health benefits, balancing predictability with potential cost efficiencies.

Understanding Level-Funded Health Plans

A level-funded health plan represents a hybrid approach to employee health benefits, blending characteristics of both fully insured and self-funded models. Employers commit to a fixed, predictable monthly payment, which simplifies budgeting for healthcare expenses. This payment covers administrative fees, a claims fund, and stop-loss insurance.

The administrative fee accounts for the operational costs of managing the plan, including claims processing and customer support. This fee is typically paid to a third-party administrator (TPA) or the insurance carrier. A significant portion of the monthly payment is allocated to a claims fund, which pays for employees’ routine medical claims. Claims are paid directly from this dedicated fund as employees utilize healthcare services.

A key feature of level-funded plans is the potential for a refund if actual claims are lower than the amount set aside in the claims fund at the end of the plan year. Conversely, stop-loss insurance provides a financial safeguard against unexpectedly high medical claims that exceed the pre-determined claims fund. This protection ensures the employer’s financial exposure is capped.

Distinctions from Other Health Plan Models

Level-funded health plans differ from traditional fully insured and fully self-funded models. In a fully insured plan, an employer pays a fixed premium to an insurance carrier, which then assumes all financial risk for employee healthcare claims. This arrangement provides cost predictability, but the employer typically receives no refund if claims are lower than expected, as the insurer retains any surplus. Fully insured plans are primarily regulated by state insurance laws, which often mandate specific benefits and premium taxes.

In contrast, a fully self-funded plan involves the employer directly paying for employee healthcare claims from their own funds as they arise. While this model offers maximum flexibility and potential cost savings if claims are low, it also exposes the employer to significant financial risk from high or unpredictable claims. Self-funded plans are generally regulated at the federal level under the Employee Retirement Income Security Act (ERISA), preempting most state insurance laws. This federal oversight means self-funded plans are not subject to state-mandated benefits or premium taxes.

Level-funded plans bridge these two models by offering a fixed monthly payment like fully insured plans, yet incorporating elements of self-funding. The employer assumes some claims risk, but this risk is mitigated by stop-loss insurance, providing a balance between control and financial protection. This hybrid structure allows employers to benefit from potential refunds for low claims, a feature not available in fully insured plans, while avoiding the full, uncapped financial exposure of a purely self-funded arrangement. Level-funded plans also typically fall under federal ERISA regulation, similar to self-funded plans, which exempts them from many state-specific insurance mandates and premium taxes.

Factors Influencing a Level-Funded Plan

The structure and cost of a level-funded plan are shaped by several key elements, beginning with the underwriting process. Before setting rates, carriers or third-party administrators (TPAs) assess the health status and demographics of the employee group. This evaluation often involves reviewing historical claims data, age, gender, and other relevant factors to estimate the group’s expected healthcare utilization and costs for the upcoming plan year. A healthier workforce, for instance, may result in lower estimated claims and more favorable monthly payments.

Claims experience plays an ongoing role in the plan’s financial performance and potential refunds. If the actual claims incurred by the employee group are consistently lower than the actuarially projected amount, the employer may receive a refund of unused claims funds at the end of the year. This refund mechanism incentivizes employee wellness and provides a direct financial benefit to the employer for favorable health outcomes within their population. Conversely, higher-than-expected claims are managed through the stop-loss insurance component.

Third-Party Administrators (TPAs) are integral to the operation of most level-funded plans, handling administrative services. These services include processing employee claims, providing customer support, and ensuring compliance with applicable regulations. TPAs act as an extension of the employer’s benefits administration, allowing businesses to offer robust health benefits without the burden of managing complex healthcare operations internally. Their expertise is particularly valuable in navigating the intricacies of claims adjudication and regulatory adherence.

Stop-loss insurance is a cornerstone of level-funded plans, protecting employers from catastrophic claims. This coverage typically includes two main attachment points: specific and aggregate. A specific attachment point applies to individual employees, meaning the stop-loss insurer covers claims exceeding a certain dollar amount for any single individual. The aggregate attachment point, on the other hand, limits the employer’s total claims exposure for the entire group over a plan year.

Regulatory Environment

Level-funded health plans operate within a complex regulatory framework primarily governed by federal law, largely due to their self-funded characteristics. The Employee Retirement Income Security Act (ERISA) of 1974 is a foundational federal statute that governs most private-sector employee benefit plans, including level-funded health plans. Under ERISA, employers sponsoring these plans have specific fiduciary duties, meaning they must manage the plan solely in the interest of the plan participants and beneficiaries. This includes responsibilities for plan administration, proper handling of participant contributions, and ensuring timely distribution of required plan documents like Summary Plan Descriptions (SPDs).

A significant implication of ERISA’s applicability is its preemption over state laws concerning health benefits. This means that while fully insured plans are generally subject to state insurance mandates, level-funded plans are typically exempt from many state-specific requirements, such as mandated benefits, reserve requirements, and state premium taxes. This preemption provides flexibility in plan design and can sometimes lead to cost efficiencies, as plans do not have to adhere to every state-specific benefit mandate.

The Affordable Care Act (ACA) also impacts level-funded plans, though its application differs from fully insured plans. While level-funded plans are considered self-funded for most compliance purposes, they are still subject to certain ACA provisions. These include requirements related to essential health benefits, coverage for preventive services without cost-sharing, and prohibitions against lifetime and annual limits on benefits. Employers sponsoring level-funded plans are generally responsible for ACA reporting obligations.

It is important to note that while ERISA preemption shields level-funded plans from many state insurance laws, states can still regulate the stop-loss insurance component itself. This means that states may impose regulations on the terms and availability of stop-loss policies, including minimum attachment points, which can indirectly influence the structure of level-funded plans. Therefore, while the core health benefit plan falls under federal oversight, the stop-loss insurance, which is integral to the level-funded model, may still be subject to state-level scrutiny.