If your renewal went up and you’ve started looking around, someone has probably mentioned level funding. It’s no longer a niche option: more than a third of covered workers at small and mid-sized firms are now in a level-funded plan. It can be a real saving, and it can also be the wrong move. Here’s how it works, in plain English, and how to tell which side of that line your business is on.
How each one works
Fully insured
This is the traditional arrangement. You pay the insurance company a premium each month, set at the start of the year. The insurer pays every claim, however large, and carries all of the risk. If your employees have an expensive year, that’s the insurer’s problem until renewal.
For small groups in Texas, a fully insured plan is priced under the ACA’s small group rules. The carrier can only use each person’s age, where you’re located, tobacco use and who is covered. It can’t charge your group more because someone is sick, and it can’t turn you down for health reasons.
Level-funded
A level-funded plan is a self-funded plan with training wheels. You still pay a fixed amount each month, but behind the scenes it’s split three ways:
- A claims fund that pays your own group’s medical claims.
- Stop-loss insurance, which protects you if claims run high. Specific stop-loss caps what any one person’s claims can cost the plan. Aggregate stop-loss caps the total for the year.
- Administration: claims processing, the network, the ID cards and customer service, usually run by a well-known carrier or a third-party administrator.
If your group uses less than the claims fund expected, part of what’s left can come back to you after the year ends. If it uses more, the stop-loss insurance covers the difference.
To your employees, it usually looks the same: they get an ID card with a familiar carrier’s name and use the same kind of network. The difference is mostly on your side of the desk.
The differences, side by side
| Fully insured | Level-funded | |
|---|---|---|
| Monthly cost | Fixed premium | Fixed amount (claims fund + stop-loss + admin) |
| Who carries the risk | The insurer | You, with stop-loss insurance capping it |
| Priced on your group’s health? | No | Yes, usually through a health questionnaire |
| Money back if claims are low? | No | Possibly, depending on the contract |
| Claims data | Available upon request | Usually reported to you |
| Rules it follows | Texas insurance law and the ACA small group rules | Federal law (ERISA) and the ACA rules for self-funded plans |
| State-mandated benefits | Required | Not required |
| Federal PCORI fee | Paid by the insurer | Paid by you: $3.84 per covered person for plan years ending October 2025 to September 2026 |
| After a bad claims year | Renewal reflects the whole small group pool | Renewal reflects your own claims, and stop-loss can be repriced or declined |
Why level funding can cost less
Under the ACA, fully insured small group plans pool everyone together. Your rates depend on ages and location, not on whether your team is healthy. That protects groups with sick employees, but it means a young, healthy crew pays for some of everyone else’s claims.
A level-funded plan is priced on your own group. If your employees are healthy, the price can come in noticeably lower, and a good year can mean a refund on top. That’s the whole appeal, and it’s real.
It’s also why insurance regulators keep an eye on it. The National Association of Insurance Commissioners has pointed out that when healthier groups move to self-funded plans, the fully insured pool they leave behind gets older and sicker. KFF’s review of the 2027 small group rate filings lists shrinking small group enrollment, as businesses move to other arrangements, among the reasons premiums there are rising. Neither of those is a reason to avoid level funding. They explain why the gap between the two prices keeps widening for healthy groups.
2019
7%
2020
16%
2021
38%
2022
35%
2023
38%
2024
36%
2025
37%
Bars run from 0 to 40%. Source: KFF Employer Health Benefits Surveys. 2019 to 2024 cover firms with 3 to 199 workers; 2025 covers firms with 10 to 199 workers.
The fine print that matters
Most of what goes wrong with level funding comes from details nobody explained at the start. These are the ones we walk every client through.
You’ll answer health questions
To price the plan, the carrier usually asks employees to fill out a health questionnaire, or looks at your claims history if you have one. A group with someone in active cancer treatment, or a high-risk pregnancy, may be priced higher or declined. That’s legal for a level-funded plan and not for a fully insured one.
Renewals depend on your own claims
A great year can bring a refund and a gentle renewal. A bad year can bring a steep one, a higher stop-loss limit on one person (the industry calls it “lasering”), or a decision not to renew. Stop-loss is written one year at a time, so the terms can change every year.
Refunds have rules
“Money back” rarely means all of it, right away. Carriers differ on how much of a surplus they return, some return it only if you renew, and most wait several months so late claims can come in first. Budget as if there will be no refund, and treat one as a bonus.
Late claims after you leave
Claims often arrive weeks or months after the care happened. When a level-funded plan ends, check how long the contract keeps paying claims for the old plan year (the “run-out” period), and whether you owe anything for claims that arrive after it closes.
You’re the plan sponsor
With a level-funded plan, your business is the plan sponsor under federal law, even though a carrier runs the day-to-day. In practice that means a few extra responsibilities:
- The federal PCORI fee. You file it once a year on IRS Form 720, due July 31.
- Nondiscrimination testing. Self-funded plans, level-funded ones included, can’t favor highly compensated employees in who is eligible or what they get. Giving everyone the same plan on the same terms usually keeps you safe.
- Benefits that differ from a Texas-regulated plan. Federal rules still require preventive care, no annual or lifetime limits on essential benefits and a cap on out-of-pocket costs. Benefits that only Texas insurance law requires don’t automatically apply.
- A different complaints route. The Texas Department of Insurance can’t take complaints about a self-funded plan; those go to the U.S. Department of Labor.
None of this is unmanageable. Good carriers and administrators handle most of it for you, and we keep track of the rest for our clients. But it should be your decision, made knowingly.
Which one fits your business
Level funding tends to make sense when:
- Your team is relatively young and healthy, with no one currently facing a major, ongoing medical condition that you know of.
- Your cash flow can absorb a bigger renewal after a bad year without forcing you to cut benefits.
- You'd value seeing your claims data and having a say in your plan design.
- Your fully insured renewal looks high for a group like yours.
Fully insured is usually the better fit when:
- Someone on the plan has serious health needs, or your workforce skews older.
- You need the cost to be predictable from one year to the next.
- You'd rather not take on plan sponsor responsibilities at all.
- Your group is very small, where one big claim can swing everything.
The good news is that the choice isn’t permanent in one direction. Fully insured small group carriers have to accept your group regardless of anyone’s health, as long as you meet their participation and contribution rules, so if level funding stops working you can move back, usually at renewal. That safety net is a big part of why level funding is a reasonable thing to try.
What about a captive?
A captive pools several employers together so they share risk and buy stop-loss as a block. Under about 500 employees, a group usually isn’t big enough to absorb a bad year, so we generally don’t recommend one. Level funding gives smaller groups the parts they actually want from a captive: some cost control, a look at their own claims and the chance of money back, without owning the risk.
Not sure which one you have now?
Look at your insurance card. In Texas, a fully insured plan’s card shows “TDI” or “DOI.” If yours has neither, your plan is probably self-funded, and level-funded plans are self-funded. Your plan documents or your broker can confirm it.
How to compare the two properly
Comparing monthly costs alone is the most common mistake. Line the quotes up on these instead:
- The worst case, not just the monthly price. For fully insured, it’s the premium. For level-funded, check whether anything can be added during the year.
- The refund terms, in writing: how much, when and on what conditions.
- The stop-loss terms: the limits, whether any person is lasered, and how the renewal is set.
- The run-out period and what happens to late claims if you leave.
- The benefits themselves, side by side, so a lower price isn’t hiding thinner coverage.
We quote both kinds of plan across the carriers that fit your group and put them next to each other with real numbers. We don’t have a house preference, and we’ll tell you plainly if level funding isn’t right for your team. If your renewal is coming up, you can ask for a quote here, or read what drives your price in the first place.