When employers think about controlling health care costs, they usually look at the obvious levers first: the deductible, the network, and how much employees contribute. Those decisions matter. But how the plan is funded gets less attention, and for many growing employers it’s one of the more meaningful strategic choices available.
Funding is also an area where good decisions depend on context. Level funding isn’t automatically better than a fully insured plan, or the other way around. Each one makes sense for a certain kind of group, appetite for risk and long-term benefits strategy. Here’s how we help employers think it through.
The short answer: A fully insured plan trades flexibility for predictability: you pay a fixed premium and the carrier carries the claims risk. A level-funded plan keeps a steady monthly payment but lets you share in the savings when claims run low, in exchange for underwriting and some added compliance work. Which fits best depends on your group’s stability, budget and appetite for risk.
What is a fully insured health plan?
A fully insured plan is the arrangement most small and midsize employers know best. You pay the insurance carrier a fixed monthly premium, and the carrier takes on the financial risk of paying claims. If claims run higher than expected, the carrier absorbs the difference. If they run lower, the carrier keeps it.
For most groups with fewer than 50 employees, fully insured small-group rates are set under the Affordable Care Act’s rating rules. Premiums are based on factors like employee age and location (and, in some states, tobacco use) rather than on the group’s own claims history. That brings real stability and predictability. It also means the employer has limited ability to benefit from a healthy year or negotiate the rate itself.
Fully insured plans often fit well when:
- Predictability and simplicity are the top priorities
- The group has limited appetite for any claims-related variability
- The team wants the carrier to handle most of the compliance and administration
What is a level-funded health plan?
A level-funded plan is a form of self-funding built for smaller and midsize groups. You still pay a consistent monthly amount, so budgeting feels much like a fully insured plan. Behind the scenes, though, that payment is split into three parts:
- A claims fund that pays employees’ actual medical claims
- Stop-loss insurance that protects the employer if claims exceed expected levels, whether from one large claim or higher overall usage
- Administrative fees for claims processing, network access and plan services
The key difference is what happens at the end of the plan year. If claims come in below the funded amount, many level-funded arrangements return part of the surplus to the employer or credit it toward the following year. The terms vary by carrier and contract, so read this provision closely.
Level-funded plans are often worth evaluating when:
- The group is relatively stable and wants more control over its plan design
- The employer would like to share in the upside of lower claims
- Leadership wants more visibility into how the plan is actually being used
- Fully insured renewals have become harder to predict or justify
What changes when you move to level funding?
Moving to level funding is a strategic decision as much as a financial one. A few considerations deserve a careful look before you make the change:
Underwriting. Level-funded quotes are typically underwritten based on the group’s health profile, often through employee health questionnaires. The proposed rates reflect that review, so the final picture isn’t clear until underwriting is complete.
Contract terms. Look closely at how surpluses are shared, how the stop-loss coverage is structured, and what happens to claims incurred near the end of the plan year if you ever move away from the arrangement.
Compliance responsibilities. Because level-funded plans are a form of self-funding, the employer takes on some additional responsibilities. One example is the annual PCORI fee, which self-funded plans pay directly. A good advisor and administrator will help you manage these, but they should be part of the conversation from the start.
Employee experience. A well-designed level-funded plan can look and feel just like the plan employees have today, with the same networks, similar deductibles and familiar ID cards. Savings should come from the funding structure, not from shifting costs onto employees.
The bigger picture: why this conversation matters now
Employer health costs have kept rising. The 2026 KFF Employer Health Benefits Survey puts the average annual premium for family coverage at more than $28,000. Looking ahead, Mercer’s annual survey projects health benefit costs per employee will rise 8.2% in 2027.
That doesn’t mean every employer needs to change course. It does mean the question “Is our current funding approach still the right fit?” deserves an answer grounded in data rather than habit. Many employers stay fully insured after a thorough evaluation, and that’s a perfectly sound outcome. The value is in making the choice deliberately.
Questions to ask before you decide
If you’re weighing level funding against a fully insured plan, these questions are a useful starting point:
- How stable is our workforce, and how much year-to-year variability can our budget absorb?
- What would our maximum annual cost be under a level-funded arrangement, including stop-loss?
- How are surpluses shared, and when would we see them?
- Can we keep our current network and plan design for employees?
- What additional compliance or administrative tasks would we take on, and who handles them?
- How does this choice fit with our benefits strategy over the next three to five years, not just this renewal?
Frequently asked questions
Is a level-funded plan the same as self-funding?
A level-funded plan is a form of self-funding designed for smaller groups. The employer funds claims, but stop-loss insurance and a fixed monthly payment make the cost predictable, much like a fully insured premium.
Can a business with fewer than 50 employees use a level-funded plan?
Often, yes. Many carriers offer level-funded plans to small groups, subject to underwriting and state rules. Minimum group sizes vary by carrier and state.
Will employees notice a difference with a level-funded plan?
They usually don’t have to. A level-funded plan can keep similar networks, deductibles and ID cards, so most of the change happens behind the scenes.
What happens if claims are higher than expected?
Stop-loss insurance covers claims above the limits set in the contract, so the employer’s maximum cost is defined up front. Higher claims can still affect the next year’s renewal.
How 1706 Advisors approaches funding decisions
We start with benchmarking. Seeing how your plan design, contributions and costs compare with similar employers in your industry and region gives every funding conversation a factual foundation. From there, we model the options side by side, explain the tradeoffs in plain language, and recommend a path only when the numbers and your goals support it.
Curious how your plan compares? Request a complimentary benefits benchmark and we’ll show you where your plan stands and which funding options are worth a closer look.
This article is for general educational purposes and is not legal or tax advice. Plan availability, underwriting requirements and contract terms vary by carrier and state.