Level-funded vs fully insured health plans
Fully insured is a fixed premium with no refund. Level-funded is a fixed monthly payment for claims funding, stop-loss and administration, with part of any unused claims money refunded after the year. In a normal year it can cost less; in a bad one you pay the full fixed amount, and the risk moves to your renewal.
Fixed cost, expected refund and the saving, per year.
- Fully insured premium$720 per employee per month
- $1,036,800
- Level-funded fixed paymentClaims funding $705,600, stop-loss $201,600, administration $93,600
- $1,000,800
- Expected claims at 60% of premiumPaid from the claims funding
- $622,080
- Refund at 50% of the surplusOf the $83,520 surplus; up to $8,352 may belong to employees
- −$41,760
- Level-funded net, expected year$666 per employee per month
- $959,040
- Level-funded, high-claims yearThe fixed payment with no refund
- $1,000,800
Same monthly rhythm, different risk after the year.
How level funding works
You pay one fixed amount each month, as you would a premium. Inside it are three parts: funding for claims up to a maximum, stop-loss insurance for claims above that, and administration. The maximum sits above your expected claims: state stop-loss rules modeled on the NAIC act put it at 110% of expected claims or more for groups over 50, and 120% or more for smaller groups. After the year, once late claims are paid, the carrier refunds the agreed share of any unused claims funding. If claims run over the funding, stop-loss pays the excess under the contract's terms.
What the fixed payment does not cover
Claims incurred in the year but paid after it are covered only for the run-out period the contract states. If you leave level funding, claims paid after that period can land on you. Refunds arrive months after the year closes, sometimes as a credit against next year rather than cash, and when employees pay part of the cost, part of the refund may belong to them.
Who each suits
Level funding suits a stable, reasonably healthy group that wants to see its own claims data. Fully insured suits a group that wants a guaranteed cost with no refund to wait for, or one with known high claimants who would be underwritten harshly.
The ACA still applies
With 50 or more full-time employees, counting full-time equivalents, you are an applicable large employer. Any plan, fully insured or level-funded, meets the employer mandate only if it is affordable and provides minimum value.
What to check in a level-funded quote.
- 01Specific deductible. The claim amount per person where stop-loss takes over, and whether the carrier can laser a high claimant at renewal.
- 02Aggregate attachment and run-out. The total claims level where aggregate stop-loss pays, and how long after the year late claims stay covered.
- 03Refund terms. The share refunded, when it is paid, whether it comes as cash or a credit, whether it depends on renewing, and how much of it belongs to employees.
- 04Renewal history. How this carrier's level-funded renewals have moved, not only the first-year quote.
- 05Plan documents. Level-funded plans are self-funded under ERISA, so you need a plan document and a summary plan description.
COMMON QUESTIONS
- Is level-funded cheaper than fully insured?
- In a year with normal or low claims it can be, because the fixed payment is often set below the fully insured premium and part of any unused claims funding comes back. In a high-claims year you pay the full fixed amount and stop-loss covers claims above the funding. In the calculator's example, with the group's own expected claims at 60% of the fully insured premium, the saving is $77,760 a year: $36,000 from the lower fixed payment and a $41,760 refund, up to $8,352 of which may belong to employees. In a high-claims year only the $36,000 remains.
- What is the risk with level funding?
- Within the contract, your cost is the fixed monthly amount plus any claims paid after the run-out period. The larger risk is at renewal: a bad claims year can bring a steep increase or a laser on a high claimant. Compare renewal histories, not only first-year quotes.
- Does part of the refund belong to employees?
- It can. When employees pay part of the cost, the share of a refund that comes from their contributions may have to go back to them or be used for their benefit. Plan for that before you count the refund as company money.
- Does a level-funded plan file Form 5500?
- A welfare plan with 100 or more participants at the start of the plan year files Form 5500. Below 100, plans paid from the employer's general assets or through insurance are exempt, so confirm with the carrier how the claims funding is held.
- Can a 50-employee company get level funding?
- Often, subject to medical underwriting and state rules. With 50 or more full-time employees, counting full-time equivalents, you are an applicable large employer, and a level-funded plan meets the employer mandate only if it is affordable and provides minimum value, like any other plan.
SOURCES
- 45 CFR 158.210: minimum medical loss ratio, 80% small group and 85% large group
- NAIC Stop Loss Insurance Model Act: aggregate attachment at 110% or 120% of expected claims
- IRS: Determining if an employer is an applicable large employer
- 29 CFR 2520.104-20: Form 5500 exemption for small welfare plans
Estimates for planning, not quotes, plan designs or tax advice. Each limit is labeled with the plan year it applies to.