Self-Funded vs. Level-Funded Plans: How to Think About the Decision

Healthcare costs are expected to rise by nearly 10% in the United States in 2027. That follows a projected 7% increase at the start of 2026.

Large companies may be able to absorb the cost, even as renewals climb annually. Companies with 100-2,000 lives, what we call the “messy middle,” often have more to consider.

Self-funded and level-funded plans are two ways to offer employees health insurance while gaining better visibility into claim data and reaping the savings in a good year. While self- and level-funded plans are quite similar, there are key differences between them that can impact cash flow, which we’ll discuss below.

Fully-Insured, Self-Funded, and Level-Funded: What’s the Difference?

Unlike fully-insured plans, where the employer pays a set cost each month while the carrier handles claims behind the scenes, self- and level-funded plans put the employer in charge of managing and paying claims.

Self-funded healthcare plans use pay-as-you-go financing, with the employer assuming the financial risk of providing healthcare benefits to employees. Rather than offloading claims to the carrier, employers pay claims as they come in. In a slow month, the employer may pay much less than with a fully insured plan, but the opposite can also be true: a month with more-than-average claims could hit cash reserves.

Self-funded plans can save money and often allow for more flexibility in benefit design, but they also require employers to maintain sufficient cash flow and reserves to cover unexpected claims. For employers seeking more flexibility while managing risk, level-funded plans could be a good option.

Think of a level-funded plan as a hybrid between fully insured and self-funded. Level-funded plans still require employers to manage claim data and payment themselves, but they set a limit, or stop-loss, on the costs the employer may face by assuming that financial risk. An employer with a level-funded plan pays a fixed monthly amount set at the beginning of the year, which covers a claims fund for expected claims, administrative fees, and the stop-loss insurance premium. Claims get paid out as they come in, with the fund paying the bill. You’ll need to work with a third-party administrator or insurer to manage this fund.

Here’s a quick breakdown of how the three options compare:

	Fully-Insured	Level-Funded	Self-Funded
Cost structure	Offers predictable monthly costs, though often higher than either level-funded or self-funded.	Offers predictable monthly costs. Employers pay a fixed monthly rate that covers both stop-loss insurance costs and potential medical claims.	Self-funded health plans involve paying for medical claims as they occur. This can lead to fluctuating monthly healthcare expenses.
Cash flow	Often easier to predict for cash flow, but will often be the highest cost of the three.	Often easier on cash flow because costs are fixed, and employers can budget for them in advance.	Employers may need to set aside more money for unexpected claims, which can affect cash flow.
Risk management	The employer assumes no risk. The insurer pays the costs.	The employer only assumes financial risk up to a specific threshold. Once that threshold is reached, the stop-loss insurance carrier assumes the risk. This helps protect employers from high claims.	Employers assume all financial responsibility for employee health claims. This can potentially lead to higher costs during bad claim years.
Claims and plan administration	The insurance carrier handles claims.	Often come with built-in administrative services and support from the insurance carrier, simplifying claims processing for employers. However, this is only when an employer has an ASO contract with a carrier. Otherwise, they’ll need to hire a TPA.	May necessitate hiring TPAs for claims management, which can add cost and complexity.
Employee coverage	State-regulated and required to include all mandated benefits, so employees get comprehensive, familiar coverage with little perceived risk.	Employees get the same comprehensive, state-mandated coverage as a fully insured plan, so the member experience is nearly identical.	Might seem riskier to employees, but it can offer specific advantages that meet unique needs.

Where Self-Funded Makes Sense

Typically, self-funding works best for employers with the size and stability to handle claims as they come in. If the following rings true, self-funding could be the right call:

• Headcount is high enough for claims to be predictable: With enough lives covered, the law of averages smooths things out month to month. At 1,000 lives, for example, one catastrophic claim is much more likely to be a drop in the bucket than at 75.
• Your balance sheet can handle the hit: Self-funding creates a roller-coaster ride for cash flow and benefits spend. You can’t predict when claims will land, but you can stomach the variability if your balance sheet can handle it.
• You want full control and access to your data: One of the top benefits of self-funding, aside from potential savings, is control. You control plan design, which may matter most for multi-state employers who want one uniform plan and direct access to claims data.

Self-funding suits employers with the reserves, risk appetite, and administrative support (internal or through a TPA) to take on full responsibility. If that’s not you, then level-funded could make sense.

Where Level-Funded Makes Sense

If the swings that come with self-funding are too much to bear, level-funded offers similar cost savings with more predictability. Here are the signs level-funded is a better fit:

• You’re too small for self-funding or risk-averse: Too small for self-funded? Level-funded protects you from claim variability if your headcount is low enough that one big claim could throw off your budget.
• You want a predictable budget: Because employers pay one level each month to cover expected claims, administration, and stop-losses, you have the cushioning to guard against a bad month. That way, level-funding offers the predictability of a fully insured plan with access to more claim data.
• Getting squeezed on fully insured plans, but not ready for self-funded: Level-funded is the natural intermediate step and often a deliberate first move toward eventual self-funding.
• They want the upside without the downside exposure: Level-funding offers the best of both worlds. You get more visibility into claim data than you would in a fully insured plan, but you’re protected from cash flow risks thanks to the stop-loss limits each month.

If you are getting squeezed on renewals each year and need another option, level-funding may provide the visibility and flexibility you need while offering the predictability that self-funding can’t.

How Brokers Can Guide Employers Through the Conversation

For employers with fully insured plans, their broker often takes a back seat in these conversations. Self- and level-funding put the broker in the driver’s seat, though.

Here’s where we find brokers can add the most value in guiding these conversations:

• Diagnosing needs
• Discuss the risks
• Assist more directly with plan setup

Lead With Discovery

Self- and level-funding have significant pros and cons. How does an employer decide?

It’s on the broker to diagnose and run discovery to help employers choose the right plan type. Before jumping to self-funded or level-funded as a definitive option, get the inputs that guide the discussion.

As a broker, you should:

• Ask what is driving the decision. Is it renewal increases? A lack of visibility into claim data? A desire for control over benefit design?
• Run a pulse check on how well they can handle variable costs.
• Check how well tuned in they are to prior health and claims history.

The answers to these questions will help frame the discussion and focus on matching a solution to their needs rather than selling them on one.

Discuss the Risks

Employers tend to overestimate self-funding’s risk. This is where a broker can translate the options for the CFO.

You can win a CFO’s trust by being specific about what “volatility” actually means. Often, there are three places an employer is most exposed:

• Claims landing unevenly from month to month
• A single catastrophic claim that spikes a given month
• With level-funded, a bad claims year or one high-cost claimant can raise next year’s renewal, with the surplus refund never guaranteed.

The best thing you can hand a CFO is a ceiling. Specific stop-loss caps what the plan pays on any one person, aggregate stop-loss caps the group’s total, and for level-funded the fixed monthly payment is the maximum. A CFO can approve a known maximum, but they can’t approve vague answers like “it depends.”

Then reframe the alternative for them.

Staying fully insured also costs more, often at a premium compared to self- and level-funded plans. Self-funding fits employers with the size, reserves, and appetite, while level-funded fits healthy mid-market groups that want upside without the swings. Steering a group into risk it can’t carry (or out of a plan that’s serving it fine) is the fastest way to lose the account.

Assist With Plan Setup

Fully insured is a bundled product that leaves little room for a broker’s involvement. Self- and level-funded plans require a much more direct hand.

There are a few key pieces required here:

• A TPA or ASO handles claims
• A stop-loss carrier caps catastrophic risk
• Often there’s a network, sometimes an Rx/PBM
• A benefits administration platform to manage and coordinate data

Orchestrating this requires effort on the broker’s part: you market the group to stop-loss carriers and TPAs, compare quotes, and choose the partners that fit, like the right TPA or ASO, the right network, and whether to carve out the PBM.

You also need to stitch the pieces together so they fit seamlessly. Eligibility and enrollment data has to flow cleanly from the benefits admin platform to the TPA to the stop-loss carrier, or a member’s coverage can be out of sync the moment a claim hits.

A good broker assembles the pieces, makes them work, and owns the result. It helps to have the right benefits admin platform underneath, though.

Where a Benefits Administration Platform Helps With Plan Deployment

If you go the self- or level-funded route, a benefits administration platform is a must for managing record-keeping and administration.

Here’s how a benefits administration platform can help employers:

• Automates administrative work: A benefits admin platform automates day-to-day tasks. That includes enrollment, eligibility maintenance, deductions, ACA reporting, and COBRA.
• Provides a clean, auditable record: If a group moves to level- or self-funded, more parties will need access to accurate eligibility and enrollment data. A benefits administration platform is the system of record that feeds them all.

And for brokers, it’s your operating system across your book of business. The benefits administration platform you offer affects how you deliver and support advice, whether you’re running open enrollment, handling mid-year changes, or managing clients across group types.

With so many options available, how do you choose the right benefits administration platform?

The right benefits administration platform isn’t the one with the most features, the best AI technology, or even the biggest logos on the homepage.

It’s the platform that silently and tirelessly works in the background; the platform that arms your team with the data you need to make better decisions; and the platform that makes open enrollment a breeze for employers and employees.

We wrote a detailed guide on how to choose a benefits administration platform, and you can access it by filling out the form below. In this free guide, you will learn:

• What features to look for
• What to ask potential vendors
• How to evaluate your options
• Which vendors are best for today’s employers

Fill out the form below to get your copy.