Why it matters
Level-funding has become a common option for smaller employers. In the KFF 2025 Employer Health Benefits Survey, 37% of covered workers at firms with 10 to 199 workers were in a level-funded plan.
The monthly bill looks like a fully insured premium, but the plan works differently underneath. The employer is self-funding its claims, with stop-loss insurance capping the risk. That changes what happens at year-end, what happens if you leave, and how next year's rate is set.
Where the monthly payment goes
Each payment is split three ways (Milliman). Here's an illustrative 40-employee group paying $30,000 a month, or $360,000 a year. The claims fund totals $264,000 for the year.
| Piece | Monthly | Share |
|---|---|---|
| Claims fund | $22,000 | 73% |
| Stop-loss | $6,000 | 20% |
| Admin | $2,000 | 7% |
| Total | $30,000 | 100% |
The split varies by carrier, group size and stop-loss level. The claims fund is usually set near the point where aggregate stop-loss starts paying, and specific stop-loss caps the claims of any one person.
Worked example: a good year and a bad year
Same group, same $360,000 for the year. Only the claims change. In the good year, about half the surplus comes back.
| Good year | Bad year | |
|---|---|---|
| Claims fund | $264,000 | $264,000 |
| Claims | $224,000 | $320,000 |
| Surplus | $40,000 | — |
| Paid by stop-loss | — | $56,000 |
| Refund | $20,000 | — |
| Your cost | $340,000 | $360,000 |
Surplus terms vary. Some carriers return 50% of the surplus, others return more, and some give a credit toward next year instead of a check (Galileo).
The catch
Level-funded plans are medically underwritten. The carrier sets the price from a health questionnaire or the group's claims history. ACA small-group plans can't price on health. A healthier group can get a lower rate than a fully insured plan. A group with a bad year will usually see it in the next renewal.
Leaving has its own rules. Claims incurred before the plan ends but paid after it (the run-out) are handled by the contract. Some carriers keep the surplus when a group leaves, or require a run-out period before any refund. Ask before you sign, not when you're ready to switch.
Read the transcript
Thirty thousand dollars a month. Every month, whether claims are high or low. That's a level-funded plan. So where does the money go?
Level-funding is self-funding with insurance on top. You pay claims up to a set limit, and stop-loss covers the rest. Nearly four in ten workers at firms with ten to a hundred ninety-nine employees are in one.
Each thirty-thousand-dollar payment splits three ways: twenty-two thousand into a claims fund, six thousand for stop-loss insurance, and two thousand for administration.
In a good year, claims come in forty thousand under the fund. Often about half of that comes back. For this group, that's a twenty-thousand-dollar check.
In a bad year, claims run fifty-six thousand over. Stop-loss pays it. The employer's cost for the year stays at three hundred sixty thousand.
The catch: your price depends on your group's health. Healthier groups get the best rates, and a bad year shows up at renewal.
So ask your broker three things. How much of a surplus do we get back? What happens to claims if we leave? And how much can our rate rise after a bad year? Find out more at actuariallysound dot com.
Common misunderstandings
Questions to ask your broker
- How much of a surplus do we get back, and as a check or a credit?
- What happens to claims and any surplus if we leave?
- How much can our rate rise after a bad year? Is there a renewal cap?
- What are the specific and aggregate stop-loss limits behind the claims fund?