Everyone is looking for ways to save on health care expenses. For employers traditionally in the small-group market, minimizing financial risk while still offering employees comprehensive coverage can be even more challenging.

In the past, self-insured health plans (and the cost savings they offer) have been limited to larger groups with the cash flow needed to administer the plan, pay claims, and withstand high-dollar expenses. But now, smaller groups are looking to an alternative self-insured arrangement called level funding.

What is level funding?

Level funding provides small groups with the financial benefits of self-insured plans. The employer makes afixed monthly payment that covers:

• Plan administration
• Stop-loss insurance
• Claims funding

At the end of the year, if your claims are less than the payments collected, the carrier refunds all or part of the overpayment. If your claims exceed the payments collected, most plans do not require the carrier to reimburse the funds advanced. However, in this case, renewal rates are likely to increase to cover the carrier’s loss. Protection from losses is provided through stop‑loss coverage, and terms vary by carrier and contract.

How does level funding work?

Payments for level-funded plans are based on the health of your employees and expected claims liability for the year. Because you will be funding your own claims and are no longer part of a community-rated plan, you may see significant cost savings—especially in the first year.

To help you understand where dollars are being spent, most level-funded plans provide monthly reports tracking:

• Number of employees and dependents covered by the plan
• Premium dollars collected
• Medical claims paid
• Prescription drug claims paid
• Stop-loss claims paid
• Total claims paid

Monthly reporting provides increased transparency and helps identify trends over time. You may also want to consider working with a broker or third-party administrator (TPA). Partners like these can help you analyze and manage the plan.

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Is level funding right for you?

Level funding can offer small employers significant savings and more predictable renewal increases. However, it’s not for everyone. For example, groups with employees who have ongoing health issues such as cancer, heart disease, and rheumatoid arthritis may not be a good fit because of high prescription drug claims and ongoing treatment.

Here are some of the advantages and disadvantages of a level-funded plan.

Advantages

• Payments are based on your group’s health.
• You pay only your group’s actual claims.
• If your payment is more than the claims paid, you could receive a refund from the surplus.
• Detailed reporting gives you a clear view of the plan and where claims dollars are being spent.
• You may reduce or avoid certain premium taxes and state‑mandated benefits, depending on plan structure and state rules.
• Access to wellness plans, case management, and utilization reviews may have a positive impact on claims.

Disadvantages

• You are financially responsible for claims up to the plan’s stop‑loss limits.
• Administrative and stop-loss fees can be high and diminish potential cost savings.
• Not all carriers work with all small groups. Due to the size of your group, you may have to work with anew carrier.
• Depending on plan size, you may be responsible for additional filings, such as Form 5500.

Implementing a level-funded plan

Moving to a level-funded plan is a big decision that impacts the health and wealth of your group both in the short term and the long term. You need someone who can explain the budgeting required to sustain a level-funded plan and support you through the implementation. A broker or TPA can help you weigh your options and provide guidance as you:

• Assess your employee population
• Evaluate the different plans available
• Determine risk tolerance

Reach out to us if you want to explore how a level-funded plan can provide your group with a cost-effective program and offer employees access to the care they need.

This content is for informational purposes only and not for the purpose of providing professional, financial, medical, or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem. Copyright ©2026 Applied Systems, Inc. All rights reserved.