Level-Funded Health Plans Explained

Level-funded plans combine fixed monthly funding with retained claims risk and stop-loss coverage. They can make cash flow more predictable than traditional self-funding, but the contract still determines who bears risk, whether a surplus can be returned, and what happens after termination. Here's what brokers need to know.

What is Level-Funding?

Level-funded health insurance is a hybrid approach where employers:

• Pay a fixed monthly amount (like fully-insured)
• Assume some claim risk (like self-funded)
• May receive a refund if claims are low and the contract provides for one
• Have stop-loss protection for catastrophic claims

The employer gets exposure to claims experience while paying a level monthly amount. That does not make the arrangement fully insured: contract terms, run-out liability, stop-loss coverage, and state rules still matter.

The arrangement is common in small-group work. In the KFF 2025 Employer Health Benefits Survey, 37% of covered workers at firms with 10 to 199 workers were in a level-funded plan, similar to 2024. More of the survey's 2025 findings are summarized in benefits trends: 2025 data, 2026 changes.

How the Monthly Payment Works

A level-funded premium is typically broken into three components. The shares below are an illustrative example, not market data: the actual split varies by carrier, group size and stop-loss terms, so take it from the proposal in front of you.

The Refund Potential

The key appeal of level-funding is the potential surplus refund:

• If claims come in under the expected amount, the employer may receive the difference back
• The share of any surplus returned is set by the contract; some return none
• Some contracts define a minimum refund or a claims corridor
• Surplus is typically settled after the plan year ends and the run-out period closes, on a schedule the contract sets

Important: Not all level-funded plans offer the same refund structure. Some have clawback provisions or refund caps. Read the fine print.

Who is Level-Funding Right For?

Good Candidates

• Healthy groups with low claims history (they'll benefit from the refund potential)
• Groups with 25-200 employees (sweet spot for credibility and risk spread)
• Employers seeking claims data to understand their population
• Groups frustrated with community-rated increases despite low claims
• CFOs who want predictable budgeting but upside potential

Poor Candidates

• Groups with known high claimants (they'll get lasered or face high rates)
• Very small groups (under 15—too volatile)
• Employers who can't handle any risk
• Groups with no interest in claims data or population health

Level-Funded vs. Fully-Insured

Key Terms to Understand

Lasering

Carriers may "laser" specific high-risk individuals—meaning their claims are excluded from stop-loss coverage or have higher individual deductibles. This is common and expected, but review lasers carefully.

Run-In / Run-Out

These provisions address claims incurred before the plan starts (run-in) or after it ends (run-out). Terminal liability coverage is important for transitions.

Aggregate Corridor

The percentage above expected claims before aggregate stop-loss kicks in (typically 125%). Lower corridors mean more protection but higher premiums.

Questions Brokers Should Ask

• What percentage of the claims fund is potentially refundable?
• Are there any clawback provisions or refund caps?
• What is the specific stop-loss deductible and are any individuals lasered?
• What happens if the employer terminates mid-year?
• Is terminal liability coverage included?
• How are claims reported and how often?

The Broker's Role

Level-funding requires more broker expertise than fully-insured:

• Explaining the funding mechanism to clients
• Analyzing whether the group is a good candidate
• Reviewing stop-loss terms and lasers
• Helping clients use claims data for wellness initiatives
• Managing renewal expectations (good years may be followed by rate increases)

This complexity is also an opportunity—level-funding lets brokers demonstrate value beyond rate shopping.

Key Takeaways

• Level-funding trades predictable monthly payments for retained claims and contract risk
• Group experience, cash flow, contract terms, and risk tolerance determine fit
• Claims data access enables better population health management
• Federal and state treatment can differ, so legal and regulatory review matters
• Stop-loss terms and lasers require careful review
• Not every group is a good fit—some are better off fully-insured

Go deeper

This guide covers the mechanism. Four companion guides cover the decisions that follow it:

• Level-funded vs fully insured: the comparison most groups actually face, and why the two quotes cannot be read side by side as printed.
• Level-funded vs self-funded: the five operational differences that decide which arrangement a group should take, and the four numbers to compare across the quotes.
• Reading the stop-loss terms on a level-funded quote: attachment points, contract basis, run-in and run-out, aggregating specific deductibles, terminal liability and lasers.
• How to present a level-funded renewal: what arrives in the packet, the five numbers to compute first, and how to handle a year that returned nothing.

Primary sources

• U.S. Department of Labor enforcement alert — level-funded risk, plan documents, and stop-loss questions for employers.
• 2026 DOL report on self-insured group health plans — stop-loss definitions and current plan data.