Navigating health insurance options can be complex for small business owners, especially as healthcare costs continue to rise. Deciding between self-funded, fully funded, and level-funded plans can have a significant impact on a business’s financial stability, risk management and administrative load.
Each of these plans offers distinct advantages and challenges. It’s essential for business owners to understand the differences, so they can select the option that aligns with their company's goals and resources.
In this post, we’ll compare level-funded vs self-funded vs fully insured. First, we’ll provide the key differences at a glance, then we take a deeper dive, outlining the pros and cons of each to help you make an informed decision for your business.
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Level Funded vs Self Funded vs Fully Funded Comparison Chart |
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Feature |
Self-Funded |
Level Funded |
Fully Funded |
|
Cost Structure |
Pay claims as they arise; variable costs. |
Fixed monthly payments; potential refund if claims are lower than expected. |
Fixed premium paid monthly; no refunds. |
|
Risk |
High risk; employer responsible for all claims. |
Moderate risk; employer covers claims up to a threshold, with stop-loss protection. |
Low risk; insurer covers all claims. |
|
Refund Potential |
Yes, if claims are lower than expected (business retains unspent funds). |
Yes, employer may get a refund if claims are lower than expected. |
No, insurer retains any unused premium funds. |
|
Stop-Loss Insurance |
Must be purchased separately to limit risk. |
Built into the plan to protect against high claims. |
Not needed, as insurer bears all risk. |
|
Customization |
Highly customizable plan design. |
Some customization in plan design (networks, deductibles). |
Minimal customization; limited to insurer’s offerings. |
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Administrative Complexity |
High; employer manages claims, compliance, and reporting. |
Moderate; third-party administrators help manage claims. |
Low; insurer handles claims, compliance, and reporting. |
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Best For |
Larger businesses or those with strong cash flow. |
Small to mid-sized businesses seeking cost control with less risk. |
Businesses seeking simplicity and risk-free healthcare plans. |
Self-funded insurance plans, also known as self-insured plans, are health insurance plans where the employer assumes the financial risk of providing healthcare benefits to its employees.
Instead of paying a fixed premium to an insurance carrier, the employer pays for medical claims out of pocket as they arise. This approach can offer more flexibility and control over the health benefits provided to employees.
Self-funded insurance plans are typically used by larger corporations that have the financial resources to absorb unpredictable medical claims. It offers significant advantages in terms of cost control and customization but also comes with a higher degree of financial risk.
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The appeal of self-funded health plans for small businesses lies in several key advantages:
Self-funded plans eliminate the administrative fees and risk premiums often associated with fully funded plans. This can result in substantial savings, as businesses only pay for the actual claims their employees incur.
Self-funded plans allow for complete flexibility in designing the benefits package. Employers can tailor their coverage options, networks, and services to best fit the needs of their employees.
Businesses using self-funded plans have greater visibility into how healthcare dollars are spent, making it easier to identify cost-saving opportunities and manage overall healthcare expenses.
Self-funded plans are not subject to state insurance regulations and premium taxes, which can result in additional savings and fewer regulatory burdens.
While self-funded health plans offer several benefits, they also come with their own set of challenges that small businesses need to consider:
The biggest challenge with self-funded insurance is the financial risk. In a year with high or unexpected claims, the cost can significantly exceed projections, putting strain on the company’s financial resources.
Self-funded plans come with complex administrative responsibilities, including claims processing, regulatory compliance, and reporting. Businesses need to have the resources to manage these processes effectively.
To protect against catastrophic claims, businesses often purchase stop-loss insurance. While this helps mitigate financial risk, it also adds to the overall cost of the self-funded plan.
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Self-funded insurance plans are subject to the same ACA reporting requirements as fully funded plans. Employers must file Form 1095-C with the IRS, detailing the health coverage offered to each full-time employee. The penalties for failure to comply with ACA reporting requirements can add up quickly.
Additionally, they must ensure compliance with ACA mandates, such as covering essential health benefits and adhering to out-of-pocket maximum limits.
Fully funded health insurance is the traditional model where an employer pays a fixed premium to an insurance carrier, which assumes all financial responsibility for employee healthcare claims.
This option provides simplicity and stability, making it a popular choice for businesses that want to minimize their financial risk and administrative responsibilities.
Fully funded insurance plans offer simplicity and security, making them a preferred choice. Here’s a look at the three main advantages of a fully funded insurance plan:
One of the most significant advantages of fully funded plans is that the insurance carrier absorbs all financial risk. This provides peace of mind to small business owners, who don’t have to worry about fluctuating healthcare costs or large, unexpected claims.
With fully funded insurance, businesses pay a fixed premium every month, making it easier to budget for healthcare expenses. There are no surprises, which is crucial for small businesses managing tight cash flow.
Fully funded plans are turnkey solutions. The insurance carrier handles all aspects of the plan—from claims processing to compliance with state and federal regulations. For small businesses that don’t have the bandwidth to manage complex healthcare plans, this can be a significant advantage.
Fully funded insurance tends to come with higher premiums. The fixed costs include administrative fees, profit margins and risk premiums that make this option less cost-effective than self-funded or level-funded plans.
Fully funded plans leave little room for customization. Businesses are locked into the carrier’s network, coverage options and cost-control measures, which may not always align with the specific needs of the workforce.
Level-funded health insurance is a hybrid model that combines the predictability of fully funded plans with some of the cost-saving potential and flexibility of self-funded plans. With a level-funded plan, businesses pay a fixed monthly amount—covering administrative fees, employee claims, and stop-loss insurance—to ensure stability in budgeting.
If actual healthcare claims come in under the projected budget at the end of the year, the business may receive a refund for the unused funds.
In short, level-funded plans offer the best of both worlds: cost control with less financial risk.
Like fully funded plans, level-funded insurance offers fixed, predictable monthly costs. But here’s where it differs—if your claims are lower than expected, you can get money back at the end of the year.
This potential for refunds makes level-funded plans an attractive option for businesses that want to keep costs in check but still benefit from good claims years.
Level-funded plans offer a predictable, straightforward selection process. Like fully funded plans, employers choose from a set list of plan options provided by the carrier. While customization is limited, the predictability of the available options can simplify decision-making for businesses.
Level-funded plans include stop-loss insurance as part of the overall plan cost, providing protection against high, unexpected claims. This built-in safety net ensures that your financial risk is limited, even if claims exceed the anticipated threshold. The fixed monthly payment covers both estimated claims costs and stop-loss insurance, offering predictability without the added financial exposure of a purely self-funded plan.
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While level-funded plans offer the potential for a refund, it’s not a sure thing. If your employees' healthcare claims exceed expectations, not only will you miss out on a refund, but you could face higher premiums in the future.
Level-funded plans typically come with higher administrative fees compared to self-funded plans. These added costs can reduce the overall savings potential and should be factored into your decision-making process.
While level-funded plans provide a safety net with stop-loss insurance, high claims during the plan year can still impact future premiums. Like fully funded plans, if claims exceed expectations, the cost of renewing the plan may increase in the following year.
Deciding between self-funded, level-funded or fully funded health insurance plans is a critical decision for small business owners. Each option carries its advantages and risks, and without the right expertise, it can be difficult to determine which plan is the best fit for your company. This is where partnering with a professional employer organization (PEO), like Axcet HR Solutions, can make all the difference.
At Axcet HR Solutions, we take the complexity out of health insurance for small businesses. We partner with United Healthcare and all the major carriers to offer a broad portfolio of health plans, ensuring you have access to comprehensive options and flexibility. Whether you're considering fully funded plans for their simplicity or level-funded plans for cost stability, Axcet has you covered.
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Here’s why a PEO like Axcet is your best partner in managing health insurance:
Our portfolio includes a range of health insurance plans with dozens of variations, allowing us to find the perfect fit for your business. Whether it’s different deductible levels or employer contribution options, Axcet tailors plans to meet your unique needs.
Our experienced benefits consultants analyze the market and present you with three to four carefully selected options that make the most sense for your business. If there’s a better option than United Healthcare, we’ll find it. Our goal is to provide you with comprehensive coverage at competitive rates.
Your dedicated Axcet employee benefits administration consultant handles every aspect of plan administration, from ensuring compliance with Affordable Care Act regulations to managing plan renewals and employee onboarding. You can focus on running your business while we manage the details.
Axcet offers fast enrollment options, ensuring your business can get PEO health insurance within 30 days of signing on—no need to wait for open enrollment. This flexibility means immediate access to the benefits your employees need.
By partnering with Axcet HR Solutions, small businesses can offer Fortune 500-level health insurance benefits, attract and retain top talent, and stay competitive in today’s market. Whether you're interested in fully funded or level-funded plans, Axcet has the expertise and solutions to make health insurance simpler and more effective for your business.
Ready to explore your options? Contact Axcet HR Solutions today to discover how our PEO health insurance solutions can transform your employee benefits strategy.