Self-Funding vs. Level-Funding: Key Differences Explained

As employers explore cost-effective employee health benefits, understanding the options available is crucial for making informed decisions. Choosing between self-funded and level-funded health plans requires a balance of flexibility, risk tolerance, and cost predictability.

Self-Funded Plans

In self-funded plans, employers pay for claims directly as they occur, allowing for full control over plan design and vendor choice. This model offers flexibility but can lead to unpredictable costs due to potential high-cost claims. To mitigate such risks, employers often rely on stop-loss insurance. Furthermore, self-funded plans are regulated by federal law (ERISA), not state insurance rules, enabling them to avoid some state mandates.

Level-Funded Plans

Level-funded plans offer a fixed monthly payment structure that bundles claims estimates, administrative fees, and stop-loss coverage. This arrangement provides financial protection against overages by capping claims, sometimes offering refunds or credits if claims are below budgeted levels. For employers, this model simplifies budgeting due to its consistent monthly payment system.

Key Differences

The primary distinction lies in risk tolerance. Self-funded plans shift full financial risk onto the employer, potentially leading to greater savings if claims are low. In contrast, level-funded plans cap this risk, offering predictability and partial refunds for any unused funds. Additionally, self-funded plans allow maximum customization, whereas level-funded plans strike a balance between customization and third-party support.

When considering company size and stability, larger or more financially stable companies might find self-funding attractive. Conversely, small to midsize businesses often benefit from the predictability of level-funding.

Ultimately, businesses must assess their financial stability, risk appetite, and desired level of control. Both funding models offer meaningful advantages over traditional insurance, tailored to specific business needs. Consulting an expert can provide further insight into selecting the most suitable employee health coverage option.