Level-Funded Health Plans: How They Work and What They Risk
37% of covered workers at firms with 10–199 workers were in a level-funded plan in 2025, according to KFF. You pay a fixed monthly amount, stop-loss insurance caps the big claims, and a good year may leave a surplus. Here's how the money moves, what the surplus terms really say, and when a fully insured plan is the safer buy.
Get a Group Quote ↓What Is a Level-Funded Health Plan?
A level-funded health plan is a group health plan you pay for with a fixed monthly amount instead of a traditional premium. Part of that payment funds your group's expected claims, and stop-loss insurance picks up claims above set limits. If claims come in lower than expected, the plan may earn a surplus after the year ends.
Level funding sits between fully insured coverage, where the insurer carries the claims risk, and self-funding, where the employer does. KFF's 2025 Employer Health Benefits Survey calls it "a relatively small self-funded component with stop-loss insurance," and found 37% of covered workers at firms with 10–199 workers in one, about the same share as in 2024. For the basics of employer coverage, see our group health insurance guide for employers. This page stays on level funding.
FreedInsure LLC (NPN: 20230457) is an independent brokerage licensed in 42 states. We quote level-funded plans next to fully insured small-group plans and ICHRAs, and our help is free. Call (844) 788-3733. This is general information, not tax or legal advice, so confirm plan details with your CPA or benefits attorney.
Quick answer: Level-funded health plans are group health plans where the employer pays a fixed monthly amount that typically funds expected claims, administration and stop-loss insurance that caps large claims. If claims run lower than expected, the plan may get a surplus refund or renewal credit, depending on the carrier. KFF found 37% of covered workers at firms with 10–199 workers were in one in 2025.
How Do Level-Funded Health Plans Work?
You pay the same amount every month of the plan year, and that money pays claims, runs the plan and buys stop-loss coverage. The payment doesn't jump when claims spike mid-year. The settling up happens after the year closes.
UnitedHealthcare, one carrier that sells level-funded insurance to small businesses, says employers "lock in a fixed monthly payment for the plan year, regardless of your actual plan participant medical claims." It's still a small business group health plan; what changes is how the money behind it moves:
📅 Fixed Monthly Payment
One level amount for the plan year, whatever claims turn out to be. It typically bundles expected-claims funding, administration and the stop-loss premium. Budget on this number.
🛡️ Individual Stop-Loss
Covers any one person's claims above a set threshold, so a single large diagnosis doesn't drain the claims fund.
📊 Aggregate Stop-Loss
Covers the whole group's claims above a set ceiling for the year. KFF says level-funded arrangements "transfer a substantial share of risk to insurers."
💰 Year-End Settlement
If claims come in low, the plan may get a surplus refund, or a renewal credit with some carriers. Terms vary.
Why stop-loss insurance matters for a small business. Stop-loss "protects your business from unexpected high claims," as UnitedHealthcare puts it. Without it, one premature birth or cancer diagnosis could drain a small group's claims fund. With both layers, a typical level-funded arrangement holds your cost for the year at the fixed payment. Ask for both thresholds in writing; they shape your protection and your price.
What Is the Difference Between Level-Funded and Fully Insured?
Both charge a fixed monthly amount during the year. The difference is who carries the claims risk, how the price is set, and which rules apply. A fully insured small-group plan puts all the risk on the insurer and follows small-group rating rules. A level-funded plan keeps part of the risk with you and prices your group on its health.
| Feature | Fully Insured Small-Group Plan | Level-Funded Plan |
|---|---|---|
| Who carries claims risk | The insurer, all of it | You fund expected claims; stop-loss insurance covers claims above set limits |
| Monthly cost during the year | Fixed premium | Fixed payment, regardless of actual claims |
| If claims run low | No year-end surplus arrangement | Possible surplus refund or renewal credit; terms vary by carrier |
| How the price is set | Adjusted community rating: premiums vary only by family size, rating area, age and tobacco use | Health status used in rating and underwriting (KFF); group-level medical underwriting |
| Essential health benefits | Must cover the full EHB package | Not required to provide all EHBs mandatory for insured plans (KFF) |
| State premium taxes | Generally apply to the insured premium | May be exempt from many state premium taxes (UnitedHealthcare) |
| Pre-existing condition exclusions | Not allowed | Not allowed (it's a group health plan) |
| Renewal | New rates each year under small-group rating rules | Renewal can reflect your group's own health and claims |
For 2026 coverage, fully insured small-group single coverage typically ran about $650–$900 per employee per month in the ranges we saw, before the employer/employee split. 2027 rates will differ; our group health insurance cost-per-employee guide has the detail. Level-funded pricing depends on your group's underwriting, so there's no honest national average. We price both on your roster.
Self-funded vs level-funded
A traditional self-funded plan keeps more risk with the employer: claims are typically paid as they come in, so monthly costs rise and fall. Level funding smooths that into one fixed payment. The line is blurry enough that in a July 2023 proposed rule, federal regulators said level-funded plans "purport to be, and are often regulated as self-funded, but they mimic many features of fully-insured plans," and asked for public comment. For one specific self-funded arrangement, see our self-insured medical expense program (SIMERP) page.
Do You Get Money Back With a Level-Funded Plan?
Maybe. If your group's claims come in below what the plan expected, there may be a surplus, but it isn't guaranteed and each carrier sets its own terms. Read the surplus language before you compare monthly prices.
UnitedHealthcare's wording is typical: if claims are "lower than expected, your health plan may get a surplus refund at year-end." Note the word may. Cigna's Level Funding Edge program, per a carrier flyer dated April 2024, instead applies a guaranteed credit to the renewal rate for new clients with 99 or fewer eligible employees, and states: "Non-renewing clients will not receive a surplus." In that design, a good year only pays off if you stay.
We don't publish an "average refund" figure. We couldn't verify one, and it wouldn't describe your group anyway. Get these answers in writing: (1) how the level-funded surplus refund is calculated and what share you keep, (2) whether it comes as cash or a renewal credit, (3) when it's paid, and (4) what happens to the surplus, and to claims still being processed, if you leave.
Budget rule: plan your year on the fixed monthly payment and treat any surplus as a bonus, never a line item. Before you promise employees a share of a refund, ask your CPA or benefits attorney how it has to be handled.
Are Level-Funded Plans ACA Compliant?
Partly. Level-funded plans are group health plans, so core group-plan protections apply, but as self-funded arrangements they may be exempt from several rules that bind insured small-group plans. That trade-off is why they can price differently.
What still applies. Federal rules say "a group health plan... may not impose any preexisting condition exclusion" (45 CFR 147.108), whatever its funding. A group health plan also can't charge one employee more than a similarly situated employee "based on any health factor" (45 CFR 146.121).
What may not apply. UnitedHealthcare says level-funded plans "may be exempt from many state premium taxes and Affordable Care Act (ACA) regulations, including adjusted community rating," and KFF notes they "are not required to provide all of the essential health benefits that are mandatory for insured plans." Insured small-group plans must use adjusted community rating and cover the full EHB package. Compare benefit summaries line by line, and confirm your compliance obligations with your benefits attorney.
Are level-funded plans medically underwritten?
Yes, at the group level: KFF says they "use health status in rating and underwriting." The federal rule that bars charging one employee more also says "nothing in this section restricts the aggregate amount that an employer may be charged," so your group's price can reflect its health and claims. Level-funded plans are marketed mainly to small and mid-size employers. Minimum group size and eligibility vary by carrier and state.
Is a Level-Funded Plan Worth It for Your Business?
It can be for a younger, healthier group that can absorb some renewal risk. It's often the wrong fit for a group with known high claims. The underwriting that rewards a healthy group can work against it after one bad year.
It tends to fit when your team is mostly younger and healthy and your cash flow can handle a renewal increase. It fits poorly when someone on the plan has a serious ongoing condition, a pregnancy or major surgery is on the calendar, or a surprise renewal jump would force you to cut benefits.
Compare it with the alternatives. An ICHRA, now also called a CHOICE Arrangement, lets a company of any size reimburse employees for individual coverage, with no group policy to underwrite. Smaller employers can also weigh a QSEHRA or PEO health insurance, and our ICHRA vs group health insurance comparison puts the main models side by side.
Straight talk: Level funding rewards young, healthy groups, and it can punish a group at renewal after one big claim. Stop-loss protects you during the year, but unless your contract includes a rate guarantee, it doesn't set next year's price. That's why we quote a level-funded plan next to a fully insured small-group plan and an ICHRA, so you see the downside as clearly as the refund. If fully insured is the safer buy for your team, we'll tell you. Call (844) 788-3733.
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