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Fully insured vs level-funded vs self-funded
The three structures differ in who carries claims risk. Fully insured moves it entirely to the carrier for a fixed premium. Self-funded keeps it with the employer, capped by stop-loss insurance. Level-funded sits between them: the employer funds claims within a fixed monthly amount, with stop-loss built in and a possible refund if claims run low.
The right structure depends less on group size than on claims credibility, cash-flow tolerance and whether the employer will actually use the claims data it gains.
Key takeaways
- Risk placement is the real difference. Everything else — cost predictability, data access, administration — follows from who carries claims risk.
- Level-funded is a self-funded arrangement. It is funded like a self-funded plan with stop-loss attached, presented with the payment predictability of a fully insured one.
- Claims data is the durable prize. Fully insured groups usually cannot see what is driving their own cost. Self-funded and level-funded groups usually can.
- Credibility matters more than headcount. A group needs enough covered lives for its own claims experience to be statistically meaningful before it is worth pricing against.
- Exiting is not symmetrical. Leaving a self-funded arrangement raises run-out liability that does not exist when leaving a fully insured plan.
What is the difference between fully insured, level-funded and self-funded plans?
All three deliver health benefits to employees. They differ in who pays claims and who absorbs the variance when claims are worse than expected.
Fully insured
The employer pays a fixed premium and the carrier assumes all claims risk. Cost is predictable within the plan year and rises or falls at renewal. The trade-off is visibility: the employer usually receives limited claims data, which makes it difficult to understand what is actually driving cost or to argue against a renewal increase with anything other than market comparison.
Self-funded
The employer pays claims as they are incurred, using a third-party administrator to process them, and buys stop-loss insurance to cap exposure. Cost tracks actual claims, so a good year is retained rather than surrendered. The trade-offs are cash-flow variability within the stop-loss corridor and materially greater administrative and fiduciary responsibility.
Level-funded
Structurally a self-funded arrangement with stop-loss attached, presented as a fixed monthly payment covering expected claims, administration and stop-loss premium. If claims run below expectation, the arrangement may return a share of the difference; if they run above, stop-loss responds within the contract terms. It gives smaller employers claims visibility and upside participation without full cash-flow exposure. Refund provisions vary by carrier and are not guaranteed.
| Fully insured | Level-funded | Self-funded | |
|---|---|---|---|
| Who carries claims risk | Carrier | Employer, within a capped monthly amount, with stop-loss | Employer, capped by stop-loss |
| Monthly cost | Fixed premium | Fixed monthly payment | Varies with claims incurred |
| Good claims year | Retained by the carrier | Possible refund, subject to contract terms | Retained by the employer |
| Claims data access | Usually limited | Usually provided | Full |
| Stop-loss required | No | Built into the arrangement | Yes, purchased separately |
| Administrative burden | Lowest | Moderate | Highest |
| Typical fit | Groups wanting predictability, or without credible claims experience | Smaller and mid-size groups seeking data and upside without full exposure | Groups with credible experience and cash-flow tolerance |
| Exit consideration | Straightforward at renewal | Run-out liability on termination | Run-out liability on termination |
| Governing framework | State-regulated insurance contract | Generally ERISA, as a self-funded arrangement | Generally ERISA |
Scroll the table horizontally on narrow screens.
Choosing between the three
- Establish whether your group has enough covered lives for its own claims experience to be credible.
- Assess cash-flow tolerance: can the business absorb a high-claims month within the stop-loss corridor?
- Ask what claims data you receive today, and what you would receive under each alternative.
- Price the stop-loss terms, not just the funding rate — the contract basis and lasers matter more than the premium.
- Model the exit: what run-out liability would you carry if you left the arrangement after twelve months?
- Decide whether anyone in the organization will actually act on the claims data you gain.
Authoritative references
Explanatory guidance
- Health Plans and Benefits — U.S. Department of LaborSupports: ERISA framework applicable to employer-sponsored group health plansVerified 26 July 2026
- Self-Insured Health Plans — Employee Benefits Security AdministrationSupports: Background on self-insured employer health plan arrangementsVerified 26 July 2026
- Questions and Answers on Employer Shared Responsibility Provisions — Internal Revenue ServiceSupports: That the employer mandate applies regardless of funding structureVerified 26 July 2026
Published 26 July 2026. Last reviewed 26 July 2026. Next review every 12 months or on material change to ERISA reporting guidance. 4J Insurance is an independent commercial insurance brokerage, powered by PGI, based in Frisco, Texas. This page provides general information about health plan funding structures. It is not legal, tax or actuarial advice, and it is not a recommendation of any structure. Availability and terms depend on underwriting.
What actually changes between the structures
Claims credibility, not headcount
The question that decides whether moving off a fully insured plan makes sense is whether the group’s own claims experience is statistically meaningful. A small group’s year is dominated by chance: one catastrophic claim can define it. Underwriters weight a group’s own experience against the wider pool according to how credible that experience is, and below a certain size the group’s own history carries little weight. Employers who move because a competitor did, rather than because their experience is credible, are buying variance rather than savings.
What changes operationally
- A third-party administrator processes claims, and selecting one becomes an employer decision rather than a carrier default
- Plan documents and a summary plan description become the employer’s responsibility
- Fiduciary obligations attach to plan decisions and plan assets
- Stop-loss becomes an annually negotiated contract with terms that matter as much as the rate
- Claims data arrives, and someone has to be responsible for reading it
- Cash flow varies month to month within the stop-loss corridor
The exit nobody prices
Leaving a fully insured plan is straightforward. Leaving a self-funded or level-funded arrangement is not, because claims incurred before termination continue to be presented afterwards. Whether those run-out claims are covered depends on the stop-loss contract basis, and an employer that never negotiated run-in or run-out terms can find itself paying claims for a plan it no longer operates. Price the exit at entry.
When a change is actually justified
- The group has enough covered lives for its own experience to be credible, and that experience is favourable
- The business can absorb a high-claims month without distress
- Someone will own the claims data and act on it
- The renewal increase cannot be explained by anything the current carrier will disclose
- The stop-loss terms available are competitive on contract basis, not merely on premium
Not every coverage or arrangement is available on every account. Terms, availability and refund provisions depend on underwriting.
Related resources
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Request a claims and funding analysis — we model the structures against your census and claims history before recommending one
Funding structure FAQ
What is the difference between level-funded and self-funded?
Level-funded is structurally a self-funded arrangement with stop-loss built in and presented as a fixed monthly payment. The employer still funds claims and still holds the associated responsibilities, but cash flow is smoothed and exposure is capped within the arrangement. Fully self-funded plans pay claims as incurred and buy stop-loss separately.
Is self-funding cheaper than fully insured?
Not inherently. Self-funding replaces a fixed premium with actual claims cost plus fixed expenses and stop-loss premium. A group with favourable, credible claims experience may pay less over time and retains a good year rather than surrendering it. A group without credible experience is buying variance rather than savings. No structure guarantees savings.
How many employees do you need to self-fund?
There is no single threshold, and headcount is the wrong test. What matters is whether the group has enough covered lives for its own claims experience to be statistically credible, together with the cash-flow tolerance to absorb a high-claims month. Level-funded arrangements exist precisely to give smaller groups some of the benefit without the full exposure.
What happens to claims if we leave a self-funded arrangement?
Claims incurred before termination continue to be presented afterwards. Whether they are covered depends on the stop-loss contract basis and any run-in or run-out provisions negotiated. This run-out liability is the most commonly unpriced consequence of changing funding structure, and it should be understood before entering the arrangement, not on exit.
Does the ACA employer mandate change with funding structure?
No. The employer shared responsibility provisions apply to applicable large employers regardless of how the plan is funded. What changes is reporting detail: self-insured employers report enrolled individuals in Part III of Form 1095-C, while fully insured employers do not because the carrier reports enrollment.
Do self-funded plans have different compliance obligations?
Generally yes. Self-funded and level-funded arrangements are typically governed by ERISA, which brings plan document, disclosure and fiduciary obligations the employer carries directly rather than through a carrier. Governmental and church plans are treated differently. Whether and how ERISA applies to a specific plan is a legal determination for your counsel.
The structure should follow the data, not the sales cycle
Before changing funding model, the question is whether your own claims experience is credible enough to price against.