Self-Funded Plan

Why it matters

Self-funding is the most common way employers provide health coverage. In the KFF 2025 Employer Health Benefits Survey, 67% of covered workers were in self-funded plans, including 80% at firms with 200 or more workers and 27% at firms with 10 to 199 workers. Many of those smaller groups are in level-funded plans, which package self-funding into a fixed monthly bill.

In a fully insured plan, the insurer takes the claims risk in exchange for a premium. In a self-funded plan, the employer takes that risk. The employer usually hires an administrator to process claims and buys stop-loss insurance to cap the worst outcomes.

Where the money goes

An illustrative group with 200 employees. The administration fee and stop-loss premium are fixed each month. Claims are paid as they come in, so they change month to month.

Expected claims average $200,000 a month, but no month looks like the average. In this example the lowest month is $168,000 and the highest is $262,000.

The fixed costs are round numbers in a typical range. Real figures vary widely with group size, stop-loss levels and the administrator.

Worked example: a good year and a bad year

Same group, same fixed costs. Only the claims change.

The employer keeps all of a good year and pays all of a bad one. Compare a level-funded plan, where often only about half of a surplus comes back and the monthly bill stays the same in a bad year.

Read the transcript

A doctor visit. An MRI. A hospital stay. In a self-funded plan, your company pays every one of these claims itself, as they come in.

Self-funding means the employer carries the claims risk, not an insurance company. It's how two-thirds of covered workers get their coverage, and eighty percent at larger firms.

Take a two-hundred-employee group. Administration and stop-loss insurance are fixed: about thirty thousand a month. Claims are not. They average two hundred thousand, but one month is a hundred sixty-eight and another is two sixty-two.

Over a year, that's two point four million in expected claims. Come in two hundred thousand under, and the company keeps all of it. Run two hundred thousand over, and the company pays that too.

Stop-loss insurance limits the damage. And self-funded plans skip state premium tax on claims, most state insurance mandates don't apply, and you see your own claims data.

The trade-off: cash flow swings month to month, the company takes on more fiduciary responsibility, and claims keep arriving for months after the plan ends.

So ask your broker three things. What would our last three years of claims have cost self-funded? Where would you set our stop-loss limits? And how much cash should we hold for a bad month? Find out more at actuariallysound dot com.

Where stop-loss fits

Stop-loss doesn't pay for an ordinary bad year. It steps in at two limits.

• Specific stop-loss caps what the plan pays for any one person. With a $150,000 specific deductible, a member with $400,000 of claims costs the plan $150,000, and stop-loss pays $250,000.
• Aggregate stop-loss caps total claims for the year, often at about 125% of expected claims. For this group that's $3.0 million, so the $2.6 million bad year falls below it and the employer pays all of it.

The stop-loss page covers both in more detail.

What else changes

• No premium tax on claims. States tax insurance premiums. Claims a self-funded plan pays aren't premiums, so they aren't taxed. The stop-loss premium is.
• Most state insurance mandates don't apply. ERISA generally preempts state insurance law for self-funded plans, including state benefit mandates (KFF). Federal rules still apply, including the ACA, ERISA, HIPAA and mental health parity.
• You see your own claims data. Fully insured groups, especially small ones, often get only summary reports or none at all. A self-funded plan's claims are its own.

The trade-off

• Cash flow swings. Claims arrive unevenly, so the employer needs cash on hand for a heavy month, not just the average.
• More fiduciary responsibility. Sponsors of insured plans are fiduciaries too, but self-funding adds responsibility for plan assets and claim decisions, usually delegated to the administrator.
• Run-out. Claims incurred before the plan ends keep arriving for months afterward (see IBNR). An employer that moves to a fully insured plan can be paying old claims and new premiums at the same time.

Common misunderstandings

Questions to ask your broker

1. What would our last three years of claims have cost self-funded?
2. Where would you set our specific and aggregate stop-loss limits, and why?
3. How much cash should we hold for a bad month?
4. What happens to run-out claims if we go back to a fully insured plan?