Level-Funded Health Plans Explained

Level-funded plans have exploded in popularity, especially among employers with 25-200 employees. They offer a middle path between fully-insured and traditional self-funding—but they're not right for everyone. Here's what brokers need to know.

What is Level-Funding?

Level-funded health insurance is a hybrid approach where employers:

• Pay a fixed monthly amount (like fully-insured)
• Assume some claim risk (like self-funded)
• May receive a refund if claims are low
• Have stop-loss protection for catastrophic claims

Think of it as "self-funding with training wheels." The employer gets exposure to their claims experience without the volatility of traditional self-funding.

How the Monthly Payment Works

A level-funded premium is typically broken into three components:

The Refund Potential

The key appeal of level-funding is the potential surplus refund:

• If claims come in under the expected amount, the employer may receive the difference back
• Refunds typically range from 0% to 50% of the claims fund
• Most carriers offer a "minimum" refund or claims corridor
• Refunds are usually paid 60-90 days after the plan year ends

Important: Not all level-funded plans offer the same refund structure. Some have clawback provisions or refund caps. Read the fine print.

Who is Level-Funding Right For?

Good Candidates

• Healthy groups with low claims history (they'll benefit from the refund potential)
• Groups with 25-200 employees (sweet spot for credibility and risk spread)
• Employers seeking claims data to understand their population
• Groups frustrated with community-rated increases despite low claims
• CFOs who want predictable budgeting but upside potential

Poor Candidates

• Groups with known high claimants (they'll get lasered or face high rates)
• Very small groups (under 15—too volatile)
• Employers who can't handle any risk
• Groups with no interest in claims data or population health

Level-Funded vs. Fully-Insured

Key Terms to Understand

Lasering

Carriers may "laser" specific high-risk individuals—meaning their claims are excluded from stop-loss coverage or have higher individual deductibles. This is common and expected, but review lasers carefully.

Run-In / Run-Out

These provisions address claims incurred before the plan starts (run-in) or after it ends (run-out). Terminal liability coverage is important for transitions.

Aggregate Corridor

The percentage above expected claims before aggregate stop-loss kicks in (typically 125%). Lower corridors mean more protection but higher premiums.

Questions Brokers Should Ask

• What percentage of the claims fund is potentially refundable?
• Are there any clawback provisions or refund caps?
• What is the specific stop-loss deductible and are any individuals lasered?
• What happens if the employer terminates mid-year?
• Is terminal liability coverage included?
• How are claims reported and how often?

The Broker's Role

Level-funding requires more broker expertise than fully-insured:

• Explaining the funding mechanism to clients
• Analyzing whether the group is a good candidate
• Reviewing stop-loss terms and lasers
• Helping clients use claims data for wellness initiatives
• Managing renewal expectations (good years may be followed by rate increases)

This complexity is also an opportunity—level-funding lets brokers demonstrate value beyond rate shopping.

Key Takeaways

• Level-funding offers the best of both worlds: predictable payments with refund potential
• It works best for healthy groups of 25-200 employees
• Claims data access enables better population health management
• ERISA preemption can avoid state taxes and mandates
• Stop-loss terms and lasers require careful review
• Not every group is a good fit—some are better off fully-insured