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 2026 Employer Health Benefits Survey, published October 22, 2026, 38% of covered workers at firms with 10 to 199 workers are in a level-funded plan, similar to 37% in 2025. KFF also flags two differences from insured small-group plans: level-funded plans may use health status in rating and underwriting, and they are not required to cover all of the essential health benefits that insured plans must. More of the survey's 2026 findings are summarized in employee benefits trends: KFF 2026 data.

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)
• Building the counter-position when the renewal arrives; the fictional counter-offer example costs a renewal, a counter and an alternate quote for the employer and each paycheck
• Checking the monthly bill, which is still billed per enrolled employee and tier, against enrollment; the fictional invoice reconciliation example shows what totals hide
• Keeping the plan documents a self-funded ERISA plan needs; see the ERISA compliance checklist

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.