Level-Funded Health Plans: 5 Key Insights Every Business Owner Should Know
Offering competitive health benefits doesn't have to strain your budget. A hybrid approach – level-funded health plans – could help you strike the right balance between quality care and cost effectiveness.
As health care costs continue to rise, finding the right group health insurance plan for your business has never been more important. Various factors, including group size, employee claims history, cash flow needs, and the desire for customization, go into this crucial choice each year.
While fully insured plans remain the traditional route, a growing number of small and midsized employers are embracing level-funded health plans for their unique blend of flexibility, cost predictability, and savings potential.
In this article, we'll explore what you need to know about level-funded health plans, including how they're structured, why they matter, and what you need to know to determine if they're the right fit for your business.
What is a level-funded health plan?
A level-funded health plan is a type of self-funded insurance that provides benefits and predictable costs. By design, these plans blend the cost stability of a fully insured plan with the customization and savings of a self-funded one.
"Think of it as a hybrid model," says John Swartz, licensed agent at Automatic Data Processing Insurance Agency, Inc. (ADPIA®) and vice president of ADP®. "Employers get the opportunity to save money if their group experiences lower-than-expected claims, while still offering the stability of fixed monthly payments."
Each standard monthly payment includes a portion for administrative costs, expected claims funding, and stop-loss insurance, which protects against high or unexpected claims.
At the end of the policy term, if your employees' health care claims were lower than projected, you could receive a refund for the unused dollars from the claims fund or roll the savings over into the next policy term – a key difference from a traditional group health plan.
How do level-funded health plans work?
While they might sound complicated, level-funded health plans are straightforward in their design. First, your insurer will examine your situation and take an estimate of your employees' expected claims for the coming year. Based on this estimate, they'll set an amount that your business will pay each month during the policy term.
As claims come up, they're paid through the available pooled funds. If your employees' actual claims are lower than projected, you'd be in line for a refund. If the claims are higher than the estimated payments, your stop-loss coverage can protect your business from those unexpected costs. However, it is important to note that higher claims could also result in a premium increase at renewal.
In most cases, level-funded plans can be managed by a third-party administrator, who will help process claims, report results, and ensure compliance with local, state, and federal guidelines.
5 benefits to consider when choosing a level-funded health plan
"There are many positives to going the level-funded route, but it's not a one-size-fits-all solution," says Swartz. "You need to do your research and evaluate if this option is truly the best one for you."
With that in mind, here are a few benefits of a level-funded health plan:
1. Customized benefits to fit your workforce
As an employer, level-funded plans give you flexibility to design health coverage that best aligns with your employees' specific needs. Whether your team needs expanded mental health support or add-ons like dental visits or prescriptions, you'll be able to tailor the plan – leading to improved employee satisfaction and engagement.
2. Predictable costs with built-in potential for savings
Unlike a traditional self-funded group health plan – where costs vary throughout the year— employers with a level-funded plan can expect to pay a fixed monthly rate, making budgeting simpler and more predictable. Additionally, if yearly claims are lower than first projected, there's room for a refund or credit – blending both financial stability and a savings upside.
3. Valuable insights into health care plan usage
Many plans typically include access to detailed claims data and utilization reports. These insights can help employers identify trends, manage high-cost claims, and make informed decisions to improve plan performance and employee health outcomes. Over time, this data-driven approach can support cost control and allow for targeted benefit enhancements, such as new wellness programs.
4. Provides protection with stop-loss insurance
One of the greatest concerns with self-funding plans is the risk of catastrophic claims. This safety net helps limit your financial exposure and keeps your budget intact. Plus, you'll have peace of mind that one or two major medical events won't alter your entire business outlook.
5. Leverages regulatory compliance with strategic resources
Even though you're paying a fixed amount each month, your business still needs to stay compliant. Many level-funded plans include access to compliance tools and expert guidance on health care laws and regulations, such as the Affordable Care Act (ACA) and the Employee Retirement Income Security Act (ERISA). This support reduces your administrative burden and minimizes risk, so that you can focus on achieving your business goals.
Transitioning to a level-funded health benefit plan
Remember, you do not have to transition from a fully insured plan to a new level-funded option alone. If you want to work with an authorized, private insurance carrier, it's best to call on experts, like ADP® affiliate, Automatic Data Processing Insurance Agency, Inc. (ADPIA®). Discussing your individual business health plan needs with a licensed insurance broker, agent, and other professionals will help you simplify the process, stay compliant with laws and regulations, and get the most out of your health insurance offerings.
"Employers are always looking for a competitive edge," concludes Swartz. "Level-funding your benefits could be your best opportunity to take back control of health care spending."
To learn more about protecting your employees and managing your health care needs, check out ADP® affiliate, Automatic Data Processing Insurance Agency, Inc. (ADPIA®), for the latest information about health insurance plans.
Automatic Data Processing Insurance Agency, Inc. (ADPIA) is an affiliate of ADP, Inc. All insurance products will be offered and sold only through ADPIA, its licensed agents or its licensed insurance partners; One ADP Blvd. Roseland, NJ 07068. CA license #0D04044. Licensed in 50 states. Certain services may not be available in all states with all carriers. Some carriers may charge an additional fee for services. This information is not intended as tax or legal advice. If you have any questions, contact a tax or legal professional. ADP, the ADP logo and ADPIA are registered trademarks of ADP, Inc. Copyright © 2025 ADP, Inc. All rights reserved.
