What Is a Level-Funded Health Plan? A Small Business Alternative to Traditional Group Health Insurance

If you're a business owner, you've probably noticed that health insurance costs seem to rise year after year. When renewal season arrives, many employers assume their only choice is to either accept the increase or reduce benefits.

What many business owners don't realize is that there may be other options available.

One option worth exploring is a level-funded health plan.

While level-funded plans have been around for years, many small employers have never heard of them or don't fully understand how they work. Let's break it down in plain English.

Traditional Health Insurance: The Fully Insured Model

Most small businesses today have what is called a fully insured health plan.

With a fully insured plan, you pay a fixed premium to the insurance company each month. The insurance company then takes on all the risk. They collect premiums, pay claims, cover administrative expenses, and keep any remaining profit.

At the end of the year, whether your employees used very little healthcare or had significant medical expenses, the money you've paid in premiums is gone.

There is no opportunity to receive any of it back.

This is the model most employers are familiar with because it's simple and predictable.

What Is a Level-Funded Health Plan?

A level-funded plan is often described as "self-funding on training wheels."

Large companies with hundreds or thousands of employees frequently self-fund their health plans. Instead of paying an insurance company to take all the risk, they essentially pay employee healthcare claims themselves.

Most small businesses don't have the financial resources to comfortably do that.

A level-funded plan offers a middle ground.

Like a traditional health plan, you still receive a fixed monthly bill. Your costs remain predictable month to month.

The difference is that your monthly payment is typically divided into three components:

• Administrative expenses
• Stop-loss insurance
• A claims fund

Rather than sending 100% of your premium directly to the insurance company, a portion is set aside to pay your group's healthcare claims.

What Is a Claims Fund?

Think of the claims fund as a pool of money earmarked specifically for your employees' medical claims.

If claims are lower than expected during the year and there is money remaining in that fund, the employer may be eligible to receive a portion of those unused dollars back.

In many level-funded arrangements, employers can receive a percentage of the surplus at the end of the plan year.

This is one of the biggest differences between level-funded and fully insured plans.

With a traditional fully insured plan, there is no opportunity for a refund if claims are lower than expected.

With a level-funded plan, there may be.

What Happens If Someone Has a Major Medical Issue?

This is usually the first question employers ask.

"What if someone gets diagnosed with cancer?"

"What if an employee needs a major surgery?"

"What if there is a six-figure medical claim?"

Fortunately, level-funded plans include something called stop-loss insurance.

Stop-loss coverage acts as a financial safety net. It protects the employer from catastrophic claims that could otherwise create significant financial risk.

If an employee experiences a major health event, the employer is not suddenly receiving a massive bill for hundreds of thousands of dollars.

The stop-loss coverage is designed to protect the business while still allowing employers to benefit when claims are lower than expected.

Why Do Level-Funded Plans Focus on Wellness?

Many level-funded carriers offer wellness programs, preventive care incentives, disease management support, telehealth services, and other health-focused resources.

The reason is simple.

Healthier employees generally result in lower healthcare claims.

Many carriers encourage:

• Annual wellness visits
• Preventive screenings
• Chronic condition management
• Access to high-quality providers
• Cost-effective prescription options

When employees take advantage of preventive care and manage health concerns early, everyone benefits.

Can Any Business Get a Level-Funded Plan?

Not always.

Unlike most fully insured plans, level-funded plans are typically medically underwritten.

That means the insurance company may review information such as:

• Employee demographics
• Prescription drug utilization
• Prior claims experience
• Overall group health risk

Because of this underwriting process, not every group will qualify.

The good news is that businesses that do qualify may find level-funded plans to be a cost-effective alternative to traditional group health insurance.

Will Renewal Rates Always Be Lower?

Not necessarily.

Claims experience still matters.

However, carriers often look beyond a single large claim and evaluate the overall health of the group.

For example, an employee who has a one-time surgery and fully recovers may be viewed differently than an ongoing condition that requires years of expensive treatment.

Every situation is unique, and renewals are evaluated individually.

Is a Level-Funded Plan Right for Your Business?

The answer depends on your company, your employees, and your goals.

Level-funded plans can be a great fit for businesses that:

• Want alternatives to large annual rate increases
• Have a relatively healthy employee population
• Like the possibility of receiving surplus funds back
• Want additional transparency into healthcare spending
• Are looking for creative ways to control benefit costs without sacrificing coverage

At the same time, fully insured plans continue to be the right solution for many employers.

That's why it's important to compare all of your options before making a decision.

Don't Assume Your Current Plan Is Your Only Option

One of the most common things I hear from business owners is:

"I didn't even know there were other options available."

Many employers simply renew the same plan every year because they are busy running their business and don't have time to analyze the market.

I've been helping individuals, families, and businesses navigate health insurance since 2007, and one thing I've learned is that there is rarely a one-size-fits-all solution.

Sometimes a fully insured plan is the best choice.

Sometimes a level-funded plan can provide meaningful savings, additional flexibility, or both.

The key is understanding the differences and comparing your options before making a decision.

How Mere Benefits Can Help

At Mere Benefits, we help employers evaluate group health insurance options without the confusing insurance jargon.

We can review your current plan, compare multiple carriers, explain the differences between fully insured and level-funded options, and help you determine what makes the most sense for your business and your employees.

Whether you're offering benefits for the first time or trying to manage another renewal increase, having an independent review of your options can often uncover opportunities you didn't know existed.

There is no cost for a consultation, and there is never any obligation.

Let's Talk

If your group health insurance renewal is approaching—or you're simply curious whether there may be a better solution available—I'd be happy to help. Schedule a free consultation with Mere Benefits and let's explore your options together.

Mere Benefits

Simplifying health insurance for individuals, families, and businesses.

Clear guidance. Right coverage. No confusion.

Frequently Asked Questions

Is a level-funded plan the same as self-funding?

No. A level-funded plan is a simplified version of self-funding designed for smaller employers. It includes built-in protections such as stop-loss insurance that help limit financial risk.

Can an employer get money back from a level-funded plan?

Potentially. If claims are lower than expected and money remains in the claims fund, the employer may be eligible to receive a portion of the surplus depending on the carrier and plan design.

What happens if an employee has a catastrophic medical claim?

Stop-loss insurance helps protect the employer from large claims and limits financial exposure.

Are level-funded plans cheaper than traditional group health insurance?

Sometimes. Every group is different. The best way to know is to compare both fully insured and level-funded options based on your company's specific situation.

How do I know if my business qualifies?

Qualification varies by carrier and typically involves underwriting. A broker can help determine whether level-funded options are available and competitive for your group.