If you’re like most business owners, you dread the annual health insurance renewal season. Premiums seem to skyrocket while your plan’s value gets stripped away. Employers feel like they have little control over the outcome.
If you’re looking for options, it’s time to look beyond traditional healthcare plans. As healthcare costs continue to climb, more small and mid-sized businesses are exploring alternatives to traditional fully insured health plans. One option that has gained significant attention in recent years is the level-funded health plan.
It might be a hot-button topic in your networking group or an article you’ve seen on LinkedIn, but what exactly is a level-funded plan, and how does it differ from traditional health insurance? Our clients have been asking, and we’re happy to help explain all the details.
What Is a Level-Funded Health Plan?
A level-funded health plan combines features of a traditional fully insured health plan with elements of a self-funded plan.
With a traditional fully insured plan, your company pays a monthly premium to an insurance carrier. The carrier assumes the risk and pays claims, regardless of how much healthcare your employees actually use.
A level-funded plan works differently.
Employers make a predictable monthly payment that is typically divided into three components:
- Administrative costs
- Stop-loss insurance protection
- Claims funding
The claims funding portion is used to pay employee healthcare claims throughout the year. If claims exceed expectations, stop-loss insurance helps protect the employer from catastrophic losses.
This structure allows employers to maintain predictable monthly costs while potentially benefiting from favorable claims experience. The best way to think of a level-funded plan is not as a different health plan; but as a different funding strategy.
One of the biggest misconceptions about level-funded health plans is that they’re simply another insurance product. Employees still have ID cards, provider networks, deductibles, and copays.
However, the way claims are reported and how the plan is administered is very different. The level of transparency allows businesses to better understand where healthcare dollars are being spent and identify opportunities to improve long-term plan performance.
While discussions around level-funded plans often focus on potential savings and refund opportunities, employers should also evaluate the compliance, reporting, and administrative considerations that come with a different funding structure.
Where Your Level-Funded Payment Goes
Administration
Ongoing plan administration & support services
Stop-Loss Insurance
Protection against qualifying high-cost claims
Claims Funding
Funds used to pay employee healthcare claims
Illustration only. Costs and protection vary by plan.
Why Are More Small Businesses Choosing Level-Funded Plans?
Self-funded plans used to be only for large organizations with thousands of employees. Thanks to changes in plan design and risk management, level-funded options are now much more accessible to smaller businesses.
It makes sense, with great perks like these:
- Greater transparency into healthcare spending
- More flexibility in plan design
- Potential cost savings
- Improved claims reporting
- Opportunities for refunds when claims are lower than expected
If you’ve felt trapped in an endless cycle of premium increases, level funding can breathe new life into your benefits strategy.
Potential Savings with Level-Funded Plans
One of the biggest reasons employers consider level-funded plans is the potential for cost savings.
Traditional fully insured plans don’t account for any variability. Whether your employees have a high-claims year or a low-claims year, the carrier retains the premium dollars.
Level-funded plans create a closer connection between actual healthcare utilization and plan costs. When employee claims remain lower than expected, employers may benefit from reduced overall plan expenses compared to a comparable fully insured arrangement.
While savings are never guaranteed, many employers appreciate having more visibility into where their healthcare dollars are going.
What Reporting Actually Looks Like for a Level-Funded Plan
Here’s the part of the level-funded story that doesn’t get talked about enough: the refund checks and rate improvements come with a trade-off, and that trade-off is reporting.
With a fully insured plan, the carrier absorbs most of the compliance workload behind the scenes. There are minimal compliance items that still apply but for the most part, you sign paperwork once a year and move on. Level funding shifts more of that burden onto the employer, and it’s not a single form or a once-a-year task. It’s an ongoing list that touches several different agencies, including:
- PCORI fee filing – an annual IRS filing tied to stop-loss and self-funded arrangements. It’s not expensive or complicated once you know what you’re doing, but it has its own deadline, its own form, and its own rules, separate from anything else on your compliance calendar.
- IRS-related filings – The most common IRS related filings is form 1094/1095 to ensure that minimum essential coverage is being provided.
- CMS-related reporting – Centers for Medicare & Medicaid Services (CMS) applies to both types of plans such as RxDC (Prescription Drug Data Collection). In addition, CMS will also require self-funded plans to submit Gag Clause Prohibition Compliance Attestation.
- Plan documentation and Form 5500 considerations – depending on plan size and structure.
None of these individually takes a significant amount of time. But together, they add up to a moving list of deadlines that are now required, and the list tends to grow, not shrink, as reporting requirements evolve year over year.
Why This Catches Small Businesses Off Guard
Here’s where the math gets uncomfortable for a lot of small businesses: the same reporting requirements apply whether you have 2 employees or 1,500.
A large company has a benefits team, or at least an HR department, whose job includes tracking this. A 20-person business usually has an office manager, a bookkeeper, or the owner, doing this in whatever time is left after payroll, hiring, and everything else running a business requires.
That gap shows up in a few predictable ways:
- Deadlines get missed simply because no one owns the calendar.
- Filings get rushed at the last minute, or handed off to a general payroll platform that treats them as an afterthought.
- Employers start to associate level funding with hassle, when the real issue is that no one is managing the reporting on their behalf.
Some businesses respond by considering a move back to a simpler payroll-and-benefits platform, or even back to a fully insured plan altogether, assuming that’s the only way to escape the reporting load.
That’s usually the wrong conclusion since fully insured plans still have a degree of compliance deadlines. The reporting is very manageable. It just requires someone whose job it actually is to stay on top of it.
How Advanced Benefit Solutions Handles the Reporting for You
This is exactly the gap we built our process to close.
When you work with Advanced Benefit Solutions on a level-funded plan, reporting isn’t something we hand you a checklist for and wish you luck.
That includes:
- Knowing which filings apply to your specific plan structure, since not every requirement applies to every level-funded arrangement.
- Reminding you of the PCORI, IRS, and CMS-related deadlines.
- Flagging anything new before it becomes a deadline you’re scrambling to meet.
You get the cost transparency and savings potential that made level funding attractive in the first place, without the reporting becoming a second job for whoever’s desk it lands on. The plan doesn’t get simpler because we make the paperwork disappear. It gets simpler because you’re not the one tracking it.
Challenges of Level-Funded Plans
The potential for savings can be exciting, but level-funded plans may not be the right fit for every business. Consider these challenges:
Claims Volatility
Employee healthcare utilization can fluctuate from year to year. A single high-cost claim or unexpected medical event can impact overall claims experience.
While stop-loss insurance provides protection against catastrophic losses, employers should understand how claims activity may affect future renewal pricing.
Underwriting Requirements
Unlike many fully insured plans, level-funded plans often involve medical underwriting during the quoting process. For smaller businesses, this can be a challenge if there are not enough individuals to offset risk or if the demographic pool includes several individuals with pre-existing conditions. These challenges may influence pricing and plan availability.
Renewal Variability
Some businesses experience favorable renewals after strong claims years, while others may face increases if claims activity is higher than expected.
Understanding how renewal pricing is determined is an important part of evaluating any level-funded arrangement.
When is a Level-Funded Plan the Right Choice?
We know the word “refund” when used in conjunction with “healthcare premiums” can be very attractive, however, don’t assume a level-funded plan is automatically better. This decision depends on employee demographics, claims history, growth plans, risk tolerance, and administrative capacity.
Partnering with a knowledgeable advisor like our team at Advanced Benefit Solutions can make a huge difference in evaluating all of your options and what is likely the most beneficial plan for your employees and your company’s bottom line.
There is no universal rule, but level-funded plans are often most attractive for businesses with approximately 10 to 150 employees.
Companies within this range are large enough to create a meaningful claims pool while still seeking alternatives to traditional fully insured coverage.
Businesses that may be good candidates often share characteristics such as:
- Stable workforce demographics
- Interest in cost management
- Desire for greater transparency
- Long-term benefits planning goals
- Frustration with recurring premium increases
That said, every business is unique. Company size alone should never determine whether a level-funded plan makes sense.
Would a level-funded plan be right for your business? Have you been frustrated by rising premiums and longing for a few different options? We’d love to talk with you before the next health insurance renewal season! Get in touch with us today.
