When it comes to providing employee health insurance, employers are faced with numerous options, each with its own benefits and complexities. Two popular choices for businesses looking to manage healthcare costs while maintaining flexibility are level-funded health plans and self-funded health plans. While they may seem similar at first glance, these plans differ significantly in their structure, financial risks, and administration. Understanding these distinctions is crucial for employers seeking the right fit for their organization.
This comprehensive guide explores how level-funded health plans differ from self-funded options, helping you make an informed decision about your company’s health benefits strategy.
What Are Level-Funded Health Plans?
Level-funded health plans are a hybrid insurance model that combines elements of traditional fully-insured plans and self-funded plans. They provide employers with predictable monthly payments while offering potential cost savings if healthcare claims are lower than expected.
With level-funded plans:
- Employers pay a fixed monthly amount to cover administrative fees, stop-loss insurance (to limit liability), and anticipated claims costs.
- At the end of the plan year, if the actual claims are lower than expected, the employer may receive a refund or credit for the difference.
- If claims exceed projections, stop-loss insurance covers the overage, protecting the employer from unexpected high costs.
Level-funded plans are particularly appealing to small and medium-sized businesses because they provide the opportunity for cost savings without the financial risks associated with self-funding.
What Are Self-Funded Health Plans?
Self-funded (or self-insured) health plans are a more traditional approach where employers take on the financial responsibility for paying healthcare claims directly, rather than paying premiums to an insurance carrier.
Key features of self-funded plans include:
- Employers set aside funds to pay for employee healthcare claims as they arise.
- Stop-loss insurance can be purchased to protect against catastrophic claims that exceed a certain threshold.
- Administrative services, such as claims processing, can be outsourced to third-party administrators (TPAs).
Self-funded plans are often used by larger organizations with a stable workforce, as they require a higher tolerance for financial risk and more resources to manage claims.
Key Differences Between Level-Funded and Self-Funded Plans
While both types of plans share the goal of providing employees with health coverage while controlling costs, their differences lie in their structure, financial risk, and administrative complexity.
1. Financial Risk and Predictability
Level-Funded Plans:
- Offer predictable, fixed monthly payments, which include administrative costs, stop-loss insurance, and projected claims.
- Employers have limited financial exposure because stop-loss insurance caps their liability for high claims.
- The predictability of costs makes it easier for businesses to budget.
Self-Funded Plans:
- Employers bear the financial risk of covering all employee healthcare claims.
- While stop-loss insurance can limit catastrophic losses, there’s still more unpredictability compared to level-funded plans.
- Businesses must have the financial stability to handle fluctuating claims expenses.
Verdict: Level-funded plans are ideal for businesses seeking cost predictability with lower financial risk.
2. Refunds and Cost Savings
Level-Funded Plans:
- Employers may receive a refund or credit if actual claims are lower than anticipated. This creates an incentive for businesses to promote wellness programs and preventive care.
- Refunds are only possible if claims remain within the projections set at the start of the plan year.
Self-Funded Plans:
- Employers benefit directly from cost savings when claims are lower because they’re not paying premiums to an insurance carrier.
- Savings are more significant in self-funded plans, as there are no restrictions on how unused funds are utilized.
Verdict: Self-funded plans can offer greater potential savings, but level-funded plans provide a lower-risk way to achieve similar benefits.
3. Plan Size and Suitability
Level-Funded Plans:
- Designed for small and medium-sized businesses (typically those with 10–200 employees) that want to take advantage of cost savings without exposing themselves to significant financial risks.
- They’re easier to manage and don’t require as many internal resources.
Self-Funded Plans:
- Typically best suited for larger organizations with more predictable claims patterns and the financial resources to handle claims fluctuations.
- Smaller companies may find the administrative burden and risk too high.
Verdict: Level-funded plans are more accessible for smaller businesses, while self-funded plans cater to larger organizations.
4. Administrative Responsibilities
Level-Funded Plans:
- Administrative tasks, such as claims processing and plan management, are handled by the insurance carrier or a third-party administrator (TPA).
- Employers don’t need a dedicated team to manage the plan, which reduces overhead costs.
Self-Funded Plans:
- Employers are responsible for plan administration, which often requires hiring a TPA or building an internal team to handle claims, compliance, and reporting.
- This adds complexity and may increase costs for smaller organizations.
Verdict: Level-funded plans offer a simpler, more hands-off approach to administration.
5. Stop-Loss Insurance Coverage
Level-Funded Plans:
- Include built-in stop-loss insurance as part of the monthly payment, which caps the employer’s liability for high claims.
- This provides peace of mind and limits exposure to financial risks.
Self-Funded Plans:
- Employers must purchase stop-loss insurance separately to protect against catastrophic claims.
- The cost and terms of stop-loss insurance can vary, making budgeting more complex.
Verdict: Level-funded plans streamline stop-loss insurance, making it easier for employers to manage.
6. Compliance and Reporting Requirements
Level-Funded Plans:
- Considered self-funded plans in terms of compliance, so employers must adhere to federal regulations like ERISA and ACA reporting.
- However, the administrative partner typically handles much of the compliance burden.
Self-Funded Plans:
- Employers must take full responsibility for compliance with federal and state regulations, including ERISA, COBRA, and ACA.
- The additional compliance burden may require dedicated staff or legal resources.
Verdict: Level-funded plans simplify compliance for employers by outsourcing much of the work.
Which Option Is Right for Your Business?
Choosing between level-funded and self-funded health plans depends on your organization’s size, financial stability, and appetite for risk. Here’s a breakdown of considerations:
- Choose Level-Funded Plans If:
- You want cost predictability and limited financial exposure.
- Your business has 10–200 employees and is exploring alternatives to fully-insured plans.
- You prefer minimal administrative responsibilities and built-in stop-loss insurance.
- Choose Self-Funded Plans If:
- Your organization is large and financially stable, with a workforce of 200+ employees.
- You’re comfortable with variable costs and have resources to manage compliance and administration.
- You’re looking for greater savings potential and have experience managing healthcare benefits.
Why Level-Funded Plans Are Growing in Popularity
Level-funded plans have become increasingly popular among small and medium-sized businesses due to their balance of cost savings and risk management. They offer a stepping stone for employers considering self-funding but hesitant to take on the full financial responsibility.
Employers who choose level-funded plans can enjoy the flexibility of customizing their health benefits while maintaining the security of predictable costs. Additionally, the potential for refunds makes these plans an attractive alternative to traditional insurance.
How to Get Started with Level-Funded or Self-Funded Plans
If you’re exploring these options for the first time, it’s essential to work with a knowledgeable partner who can help you navigate the complexities of health plan selection. Here are some steps to take:
- Assess Your Needs: Consider your organization’s size, financial stability, and employee healthcare needs.
- Consult an Expert: Work with a benefits consultant or broker who specializes in level-funded and self-funded plans.
- Evaluate Costs: Review the projected costs, including administrative fees, stop-loss insurance, and claims funding.
- Analyze Risks: Understand the financial risks associated with each option and determine your organization’s risk tolerance.
- Monitor and Adjust: Once a plan is implemented, track claims data and adjust the plan as needed to maximize savings and efficiency.
Final Thoughts
Understanding the differences between level-funded and self-funded health plans is crucial for employers seeking to provide competitive and cost-effective benefits. While both options offer unique advantages, level-funded plans stand out for their predictability, limited risk, and accessibility for smaller businesses. On the other hand, self-funded plans provide greater flexibility and savings potential for larger organizations with the resources to manage them effectively.
By carefully evaluating your business’s needs and working with experienced professionals, you can choose the health plan that best aligns with your goals and budget. Whether you’re leaning toward the stability of a level-funded plan or the flexibility of a self-funded option, the right choice will empower your organization to support employee health while controlling costs.