Level-Funded Health Plans for Companies Under 100 Employees

Level-funded health plans give companies under 100 employees a way to combine fixed monthly spending with a share of savings when claims run below expectations. The decision to leave fully insured coverage, however, depends on more than refund potential. Employers must understand how the funding works, how underwriting and stop-loss bound the risk, and whether they can manage the responsibilities that come with sponsoring the plan.

Why small employers are leaving fully insured plans and what they are moving into

The renewal letter can make a small employer’s options appear narrower than they are. A steep increase arrives, but the market has moved beyond accepting another fully insured premium. The American Academy of Actuaries identifies continued shifts to level-funded and self-funded coverage as major factors worsening the small group risk pool in 2026. Under ACA community rating, healthier companies share costs with less healthy groups, and their departure concentrates risk among those who remain. That concentration creates further pressure on premiums.

KFF surveys show that level-funded coverage accounted for a far larger share of workers at small firms in 2025 than in 2019. This shift makes level funding an important alternative to evaluate. Its appeal begins with a different allocation of the employer’s monthly payment.

How the three-component structure of a level-funded plan actually works

A level-funded payment flows into three buckets, which are the claims fund, stop-loss insurance, and administrative fees. The claims fund holds money set aside to pay employees’ medical claims based on how much care they are expected to use. Stop-loss insurance protects the employer when claims go above set limits. Administrative fees pay for plan management, network access, claims processing, and compliance services through the insurer or a third-party administrator, or TPA. The monthly outlay is fixed, but its components serve different purposes.

Stop-loss protection has two forms. Specific stop-loss applies when one person’s claims exceed the attachment point at which that protection begins. Aggregate stop-loss puts a cap on what the group owes for claims once they go above the expected amount plus a set margin, known as a corridor. Together, these protections set the most the employer could have to pay before the plan year begins.

At year end, the claims fund produces two possible outcomes. If claims fall below the funded amount, the employer can receive a contractual share of the surplus. If claims exceed projections, stop-loss covers the overage under its terms.

What surplus refunds actually mean in practice and how stop-loss shapes the risk floor

Neither the amount of a potential refund nor its arrival is guaranteed. The surplus depends on actual claims relative to the funded amount, and the employer’s share depends on the contract. Employers should get that share in writing before they sign. A favorable claims year can return money that would otherwise remain with a fully insured carrier, but a projected refund is not a dependable budget credit.

Stop-loss makes that upside practical without leaving a small employer exposed to an unplanned catastrophic claim. A lower specific attachment point provides more protection but raises the stop-loss premium and the fixed monthly cost. Employers should also understand the aggregate corridor relative to projected spending and negotiate provisions governing “lasering” before signing. At renewal, lasering can assign a higher individual deductible to a known high-cost employee, shifting that exposure back to the employer.

Stop-loss carriers and administrators reprice using the employer’s actual claims experience. A bad year therefore affects that company’s next price directly, rather than only contributing to a community-rated pool. The contract caps what the employer could have to pay in the current year, but costs could still rise at renewal.

How level-funded plans use health-status underwriting and why that changes who qualifies

Health-status underwriting is the main filter for who qualifies. ACA-compliant small group fully insured plans must use community-rating factors including age, geography, family size, and tobacco use to set prices, and cannot use employee health status. Using workforce health in underwriting gives level-funded plans a cost advantage for healthy groups. It also makes coverage expensive or unavailable for some groups with chronic conditions, recent high-cost claims, or older average demographics.

Availability to very small groups does not remove this filter. Before comparing proposals, employers need to take an honest look at their claims history and the health of their workforce. Large recent claims may make fully insured coverage a better deal, even with the advantages of how level funding works. The return path does provide some flexibility because small groups can return to ACA coverage without their claims experience affecting future ACA rates. That option reduces the risk of the initial move but does not make an uncompetitive level-funded proposal attractive.

The ERISA advantages that come with level-funded status and what they cost in administrative responsibility

Under ERISA, level-funded plans are treated the same way as self-funded coverage. They are generally exempt from state insurance benefit mandates and state premium taxes, creating savings beyond the claims fund. An employer in a state with expensive requirements can capture more savings than one in a state with fewer mandates. Avoided premium taxes can also make a material difference across the plan year.

The same classification places legal responsibility for benefits compliance on the employer as plan sponsor. Brokers, TPAs, and ERISA counsel can support execution, but using those services does not remove the employer’s accountability. Penalties for compliance failures fall on the employer rather than automatically transferring to the service provider. This is a trade between savings and compliance responsibility. The savings are worth evaluating, provided administrative support is part of the decision.

The compliance obligations that shift to the employer under a level-funded arrangement

Employers need to look closely at Form 5500 because having fewer than 100 employees alone does not tell them whether they must file. Funded welfare plans may not qualify for the small plan exemption, and WRAP plan documents affect how participants are counted across combined benefits. The employer must find out whether it needs to file and make sure the filing is correct and sent on time. A carrier or TPA does not automatically take on that responsibility. Filings that are missing or wrong can bring large penalties for each day.

ACA coverage reporting also requires explicit coordination. For employers at 50+ full-time equivalents, fully insured coverage does not remove the employer’s existing Form 1094-C and Form 1095-C obligations. Under level funding, coverage reporting that the insurer previously handled also becomes the employer’s responsibility. The employer must coordinate that work with the TPA or a compliance vendor.

Federal COBRA applies to employers with 20 or more employees, and its administration must be assigned under the new arrangement. Smaller companies face a different issue because most state continuation laws apply only to fully insured plans. Moving to level funding may therefore mean that terminated employees lose their continuation rights. The Department of Labor’s Employee Benefits Security Administration identifies mental health parity, cybersecurity, and surprise billing among its 2026 enforcement priorities. These obligations are manageable, but each needs a named owner before the plan year starts.

Why controlling claims costs is harder in practice than the refund math suggests

Monthly claims reports provide visibility that fully insured carriers typically withhold, but visibility is not control. A report can identify expensive utilization without changing what an employee does when care is needed immediately. Employees may choose the nearest ER, use an out-of-network provider, miss preventive care, or miss chances to pay less for prescriptions. Those decisions can erode the claims fund even when the funding structure is sound.

The employer can make cost-effective choices easier through plan incentives, education, and navigation support while leaving individual care decisions to employees. That distinction explains why a plausible refund projection may not become an actual surplus. Claims transparency supplies the evidence for improvement, but employee support is what connects that evidence to decisions at the point of care.

Plan design and employee support strategies that actually influence claims

Keeping costs down takes work on plan design throughout the year as well as at enrollment. Narrow network PPO options can use lower rates that have been negotiated, while incentives can steer employees who need elective procedures toward facilities that offer high-quality care at a lower cost. Low or no cost-sharing for telemedicine can make it a practical first option for non-urgent care. Preventive-care programs can help find chronic conditions earlier. Deductibles, copays, and coinsurance can then be refined at renewal using the prior year’s claims evidence.

These provisions need support that employees can use when choosing care. Employers should encourage employees to use navigation tools that help them find in-network providers and compare costs. Education should explain when to use telemedicine, urgent care, or the ER, how to verify network status, and where to find prescription alternatives. A PDF and an 800 number alone are not sufficient if help is inaccessible when the decision occurs.

Employers should review monthly claims reports with their broker or benefits partner quarterly. Finding what drives costs, such as mental health, musculoskeletal care, or specialty drugs, lets employers target changes where they are needed. A partner that uses AI-powered analysis to look at claims alongside carrier pricing can help find ways to save that may be missed when quotes are compared only once a year.

How level-funded plans compare to fully insured plans, self-funded plans, and PEO-bundled coverage for companies under 100 employees

Fully insured coverage remains a strong fit for groups with high-cost claimants, older workforces, or underwriting results that make level funding uncompetitive. It offers predictable premiums, a lighter administrative burden, mandated essential health benefits, and state guaranty fund protection if the carrier becomes insolvent. Its principal trade-off is that favorable claims experience does not produce an employer surplus. The employer’s price at renewal still depends on community-rated pricing.

Traditional self-funding offers the greatest control over plan design and retains the most savings in a favorable year. It also requires employers to fund claims as they arrive, creating month-to-month cash-flow variability. That makes it a better fit for employers with a steady headcount above roughly 100 employees, cash in reserve, and the ability to handle benefits administration. Level funding provides a route into self-funding for smaller employers by replacing that variability with a fixed monthly payment. It fits only when underwriting is competitive and compliance work can be supported.

PEO-bundled coverage can provide competitive master-plan rates for very small groups that cannot negotiate effectively on their own. As headcount grows and the employer develops its own claims history, independent level-funded pricing can become more attractive than the blended rate. Leaving a PEO still takes careful planning because keeping benefits in place, handling COBRA administration, and doing ACA reporting all shift at the same time.

An AI-native benefits brokerage can help with the work of running the plan while keeping the funding model the same. Combining claims analysis and annual market evaluation with compliance monitoring, employee concierge support, and open enrollment can provide the infrastructure a plan sponsor needs. Delivering those services through the employer’s existing HRIS also avoids the co-employment structure of a PEO. The relevant distinction is sustained support.

How to evaluate whether a level-funded plan is the right move for a specific company

First, assess group size and health profile against actual underwriting terms. If recent claims include a high-cost claimant, get a fully insured quote alongside the level-funded proposal to check for savings before counting on them.

Second, evaluate continuation coverage before switching. Smaller employers should find out whether terminated employees would lose state continuation rights, especially if they expect layoffs or many employees to leave.

Third, identify compliance capacity. Assign responsibility for Form 5500, applicable ACA reporting, COBRA administration, and CAA transparency obligations, with contractual duties made explicit where outside providers perform the work.

Fourth, assess operational readiness for plan sponsor status. The company needs HR, TPA, or benefits-partner capacity to handle employee questions, claims disputes, and mid-year life events.

Fifth, require annual renewal benchmarking. Stop-loss pricing, carrier rates, and claims experience change, so the incumbent proposal cannot be treated as the only option. Ask for a side-by-side comparison of fully insured and level-funded costs based on the company’s actual claims data and current carrier quotes, with the specific stop-loss attachment points and the aggregate corridor clearly shown.