What Is Level Funded Insurance and How Does It Work?

Providing health insurance benefits to employees can be complex, with various funding models available. Level-funded insurance has emerged as a notable alternative, particularly for small to mid-sized employers. This approach balances the cost predictability of traditional insurance with the potential for savings often associated with self-funded plans. Understanding level-funded insurance is important for businesses evaluating their healthcare benefit strategies.

What Level Funded Insurance Is

Level-funded insurance represents a hybrid approach to employee health benefits, combining elements of both fully insured and self-funded plans. Under this model, an employer remits a fixed, consistent payment each month to an insurance carrier or third-party administrator (TPA). This payment covers administrative fees, the cost of stop-loss insurance, and a claims fund for employee medical expenses.

A characteristic of level-funded plans is their predictability in budgeting, as the employer knows the exact monthly cost. Unlike traditional fully insured plans where unused premiums are retained by the insurer, level-funded plans offer the potential for a refund at the end of the plan year. If healthcare claims are lower than the amount allocated to the claims fund, the surplus may be returned to the employer. This refund mechanism provides a financial incentive for managing employee health.

Level-funded plans are a form of self-funded insurance, but with a key difference: the inclusion of stop-loss insurance. This component protects the employer from unexpectedly high claims, limiting financial exposure to a predetermined threshold. The blend of fixed monthly payments, potential refunds, and catastrophic claims protection makes level-funded insurance a balanced option for businesses seeking cost control and risk management.

How Level Funded Plans Operate

Level-funded health plans function through a distinct financial structure, comprising three components: fixed administrative costs, a claims fund, and stop-loss insurance. Each month, the employer’s consistent payment is allocated across these areas. This predictable structure allows businesses to forecast healthcare expenditures accurately.

A portion of the monthly payment covers administrative fees charged by the insurance carrier or third-party administrator (TPA). These fees compensate for services such as claims processing, customer support, network access, and compliance management. Administrative costs ensure the smooth operation of the plan, often with greater transparency regarding fund utilization.

Another portion of the monthly payment is directed into a claims fund. This fund serves as the pool from which employees’ routine medical claims are paid. The amount contributed is actuarially determined based on the group’s expected healthcare utilization, considering employee demographics and prior claims history. If, at the end of the plan year, total claims paid are less than the employer’s contributions, the remaining balance may be refunded. These refunds can be issued as cash or as a credit towards future premiums.

The third component is stop-loss insurance. This coverage acts as a financial safety net, protecting the employer from catastrophic individual claims or exceptionally high aggregate claims. Stop-loss policies have two thresholds: a specific attachment point and an aggregate attachment point. The specific attachment point defines the maximum amount an employer is responsible for a single employee’s claims. Once an individual’s claims exceed this limit, the stop-loss insurer covers the additional costs. The aggregate attachment point limits the total amount an employer is responsible for all group claims during the plan year. If total group claims surpass this limit, the stop-loss policy covers the excess. This protection mitigates financial risk, offering employers stability even with unexpected high medical costs.

Comparing Funding Approaches

Level-funded insurance occupies a unique position within health benefit funding, distinct from both fully insured and traditional self-funded models. Fully insured plans, common for many businesses, involve the employer paying a fixed premium to an insurance carrier, which assumes all financial risk for employee claims. With fully insured plans, the employer has predictable monthly costs but no direct control over claims data or opportunity for refunds if claims are low. The insurance company handles all claims administration and compliance, and these plans are primarily regulated at the state level.

Traditional self-funded plans involve the employer directly paying for employee medical claims as they occur, assuming full financial risk. While this model offers control over plan design, access to claims data, and potential savings, it also exposes the employer to unpredictable monthly costs and the risk of large, unexpected payouts. Self-funded plans are regulated under federal law, specifically the Employee Retirement Income Security Act of 1974. Larger companies with substantial cash reserves often opt for this model.

Level-funded plans bridge the gap between these two extremes. Like fully insured plans, they offer predictable, fixed monthly payments, providing budgeting stability. Similar to self-funded arrangements, they allow employers to benefit from lower-than-expected claims through potential refunds and provide greater transparency into claims data. While level-funded plans are a form of self-funding, the embedded stop-loss insurance significantly reduces the employer’s financial risk, capping liability for high-cost claims. Regulatory oversight for level-funded plans often treats them as self-funded under federal law, though some state regulations may apply.

Deciding if Level Funded is Right for You

Choosing a level-funded health plan requires considering a business’s specific circumstances and risk tolerance. These plans are well-suited for small to mid-sized businesses, typically those with 10 to 100 employees, seeking a balance between cost predictability and potential savings. Businesses with a relatively healthy employee population are often good candidates, as lower claims utilization correlates with a higher likelihood of receiving a refund.

An assessment of the workforce’s health demographics is a first step. If a company has a history of consistently low claims or a younger, healthier employee base, a level-funded plan can be more cost-effective. Businesses should also evaluate their risk tolerance; while stop-loss insurance provides a financial ceiling, some claims risk remains up to the attachment points. Understanding how high claims could impact cash flow, even with stop-loss, is important.

Finally, consider the business’s administrative capacity. While third-party administrators handle much of the day-to-day claims processing, employers in level-funded plans often have more access to claims data and may engage more actively in plan management and wellness initiatives. This increased engagement can optimize benefits and promote employee well-being, but it requires utilizing the data and insights provided.