Level-Funded Group Health Insurance Plans

What Are Level-Funded Group Health Insurance Plans?

Level-funded group health plans are gaining traction as an alternative to traditional fully-insured and self-funded health insurance. These plans combine the predictability of fixed monthly payments with the potential cost savings of self-funding, making them an attractive option for small to mid-sized businesses.

Employers pay a fixed monthly amount that covers three components:

• Administrative Costs: Includes third-party administration (TPA), network access, and customer support
• Claims Funding: Allocated for employee healthcare claims
• Stop-Loss Insurance: Protects against catastrophic claims by capping the employer’s financial risk

If claims are lower than anticipated, employers may receive a refund of unused funds at the end of the coverage year. Conversely, if claims exceed the funded amount, the stop-loss insurance covers the overage, ensuring financial predictability.

Benefits of Level-Funded Group Health Insurance Plans

There are a few different advantages to having a level-funded insurance plan: 

• Avoidance of State Taxes: Since level-funded plans are governed by federal law under ERISA (Employee Retirement Income Security Act), employers can avoid state insurance premium taxes.
• Claims Transparency: Employers gain access to anonymized claims data, enabling them to identify trends and implement cost-saving strategies.
• Cost Predictability: Fixed monthly payments eliminate the uncertainty often associated with self-funded plans.
• Flexibility: Employers can customize the benefits of a level-funded plan to suit their workforce’s needs.
• Lower Costs: Level-funded plans often have lower premiums than fully-insured plans, especially for healthy employee groups.
• Refund Potential: Employers may receive a refund if claims are lower than anticipated, providing an opportunity for savings.

What to Consider When Choosing a Level-Funded Group Health Insurance Plan

Despite their advantages, level-funded health plans have some elements that employers should carefully consider:

• Administrative Complexity: Employers must manage additional administrative tasks when using a level-funded plan — most will partner with TPA for assistance.
• Financial Risk: While stop-loss insurance mitigates catastrophic claims, employers are still responsible for regular claims up to the funded amount.
• Limited Refunds: Not all surplus funds may be returned at the end of the coverage year — the refund is dependent on the plan’s terms.
• Regulatory Requirements: Employers must ensure compliance with federal regulations, including reporting requirements under ERISA — partner with a knowledgeable insurance agency to help you navigate these requirements.
• Unsuitability for High-Risk Groups: Businesses with high claims frequency may not see savings and could face higher costs.

For Whom Are Level-Funded Group Health Insurance Plans Best Suited?

Level-funded plans are best suited for:

• Cost-Conscious Employers: Those who are seeking predictable costs with the potential for savings
• Growth-Oriented Companies: Organizations that want the flexibility to scale benefits as they expand
• Healthy Workforces: Employers with low healthcare utilization rates can maximize refund opportunities
• Small to Mid-Sized Businesses: Companies with 10 - 200 employees looking for an alternative to fully-insured plans

When to Enroll in a Level-Funded Group Health Insurance Plan

When employers enroll in health insurance is dependent upon a few factors, but it is usually one of the following:

• Fiscal Year Enrollment Period: This enrollment season is tied to the company’s fiscal year, which could differ from a calendar year. During fiscal year enrollment, employers could enroll in coverage whenever it aligns with the end of their fiscal year.
• Main Open Enrollment Period: For most companies with a fiscal year that aligns with the calendar year, the enrollment season is the main one in October and November. For most states, OEP begins November 1st and runs through December or January 15th.