Self-Funding vs. Level-Funding: Making the Right Choice

Sep 09 2025 15:00

A white background with a few lines on it

HOW CAN WE HELP YOU OUT?

Exploring Cost-Effective Employee Health Benefits

Employers navigating the maze of employee health benefits have a lot to consider, especially when it comes to balancing cost and coverage. Two popular options often under the spotlight are self-funding and level-funding. Understanding the nuances between these plans can empower employers to make decisions that align with their financial stability, risk tolerance, and need for plan control.

Self-Funded Plans

A self-funded plan offers employers direct control over health benefit expenditures. Instead of paying fixed premiums to an insurance company, employers fund claims as they occur. This method provides total autonomy over plan design and the choice of vendors. However, this flexibility comes with a caveat: the unpredictability of high-cost claims, which necessitates stop-loss insurance to mitigate potential financial fallout. On the regulatory side, self-funded plans are governed under federal law (ERISA) rather than state insurance regulations, which can offer different compliance requirements and flexibilities.

Level-Funded Plans

In contrast, level-funded plans combine the control of self-funding with the predictability of fixed payments. Employers pay a consistent monthly amount covering claims estimates, administrative fees, and stop-loss coverage. This plan includes built-in financial protections with a claims cap that shields employers from excessive overages and may provide refunds or credits if claims come in below projections.

Key Differences

When comparing risk tolerance, self-funded plans place the full financial burden on the employer, whereas level-funded plans cap exposure, offering peace of mind with budget certainty. For cost predictability, level-funded plans stand out with their structured monthly payments, aiding in simplified budgeting processes. As for savings, while self-funded plans might afford greater long-term savings if claims remain low, level-funded plans balance out the financial equation with potential partial refunds. In terms of customization, self-funded plans allow extensive tailoring but require significant administrative input, whereas level-funded plans offer a middle ground with third-party support.

Choosing the Right Fit

Larger organizations or those with robust financial health may find the savings potential of self-funding attractive. Meanwhile, smaller to mid-sized businesses often benefit from the predictability and risk-shielding nature of level-funding. Employers should carefully evaluate their company's financial health, risk appetite, and desire for administrative control in crafting their employee health benefits. Ultimately, both self-funded and level-funded plans offer significant advantages and present compelling alternatives to traditional insurance, each aligning well with varying company needs. For those ready to explore these options further, consulting an expert can prove invaluable in identifying the best-fit health coverage solution for their business.