Employers looking to break free from fully insured health plans often encounter two funding strategies: level-funding and self-funding. Both options give employers more control over plan design and potential savings — but they work very differently. Understanding the differences and the risks is essential to picking the right approach for your organization.
What Is Self-Funding and How Does It Work?
In a self-funded health plan (also called self-insured), the employer pays the cost of employees’ medical claims directly rather than paying a fixed premium to an insurance carrier. This funding model gives employers maximum flexibility and control over their healthcare spend.
Core Components of Self-Funded Plans
Claims Funding: The employer funds claims as they are incurred throughout the plan year.
Administrative Services Only (ASO) Fee: Paid to a Third-Party Administrator (TPA) to process claims, manage network access, and handle day-to-day plan administration.
Stop-Loss Insurance: Protects the plan against catastrophic claims through specific stop-loss (individual high-cost claims) and aggregate stop-loss (unusually high overall claims).
Learn more about self-funded PPO plans and stop-loss protection →
What Is Accommodation in Self-Funded Plans?
A key feature of many self-funded plans is accommodation — an arrangement where the TPA pays claims on behalf of the employer and then bills the employer for reimbursement, typically on a weekly basis. This keeps claims flowing smoothly even when a single large claim occurs, allowing the employer time to fund the plan without cash-flow disruption.
Important: Accommodation does not reduce the cost of the plan — it simply manages the timing of cash outlay to prevent disruption.
What Is Level-Funding and How Does It Work?
Level-funding is often described as “self-funding with training wheels.” It combines the cost-saving potential of self-funding with the predictability of fixed monthly payments. Employers pay a consistent monthly amount that includes:
Estimated Claims Fund: A set amount based on projected claims experience.
ASO/Administrative Fees: Covers claims processing, network access, and plan administration.
Stop-Loss Premium: Protects against large claims, just like in a traditional self-funded plan.
Year-End Reconciliation in Level-Funded Plans
At the end of the plan year (after claims runout):
- If claims were lower than expected, the employer may receive a refund of unused claims funds
- If claims were higher than expected, stop-loss insurance covers the excess, and the employer does not owe more than the fixed monthly contribution
This creates a “best of both worlds” scenario: predictable monthly costs with upside potential for savings.
Understanding Level-Funding Percentages: 100%, 75%, 50%
Level-funded plans can be structured at different claim funding levels, each with distinct trade-offs:
100% Level-Funded Plans
The employer pays the full expected claims amount monthly. This structure offers the highest refund potential but requires the highest monthly cash outlay. It operates most similarly to a true self-funded arrangement.
75% Level-Funded Plans
The employer funds approximately 75% of expected claims, with the carrier or TPA covering the remainder through stop-loss mechanisms. Monthly premiums are lower than 100% funding, but refund potential is reduced.
50% Level-Funded Plans (or Less)
These plans require lower upfront costs but shift most of the plan’s financial risk back to the stop-loss carrier. This structure operates closer to a fully insured plan, with minimal refund potential.
Key Principle: The closer to 100% you fund, the more your plan operates like a true self-funded arrangement — with higher reward potential through refunds but greater monthly cash outlay.
Contact us to model different funding scenarios for your organization →
Risk of Underfunding: What Employers Need to Know
The primary risk in partially funded or self-funded plans is underfunding — failing to budget adequately for expected claims costs.
Level-Funding Underfunding Risk
You may lose refund potential if you underfund. Lower funding levels mean you prepay less, leaving less available to refund at year-end if claims run favorably.
Self-Funding Underfunding Risk
If expected claims are underestimated and you don’t budget properly, you may need to make large unplanned contributions later in the year to keep the plan solvent and ensure claims are paid.
Best Practice: Accurate underwriting, complete census data, and conservative claim projections are essential to avoid mid-year funding surprises and budget shortfalls.
Additional Costs in Self-Funded Plans
Even when a self-funded plan is funded to maximum expected claims levels, employers must budget for additional regulatory and administrative costs:
Federal Reporting Fees: PCORI (Patient-Centered Outcomes Research Institute) fees apply to self-funded plans regardless of claim volume.
RxDC Reporting: CMS requires annual prescription drug data collection (RxDC) reporting, often involving consulting or administrative fees to prepare and submit data correctly.
Plan Document and Compliance Updates: Regular updates to Summary Plan Descriptions (SPD), Summary of Benefits and Coverage (SBC), and other ERISA-required notices.
Stop-Loss Renewal Costs: Specific and aggregate stop-loss premiums typically renew annually and may increase based on claims experience and market conditions.
These costs do not disappear regardless of funding level and must be incorporated into annual budgets.
Get help with RxDC reporting and ERISA compliance →
Level-Funding vs. Self-Funding vs. Fully Insured: Comparison Chart
| Feature | Fully Insured | Level-Funded | Self-Funded |
| Monthly Cost Predictability | Highest (fixed premium) | High (fixed monthly contribution) | Variable (claims fluctuate month to month) |
| Cash-Flow Risk | None – carrier bears risk | Capped – no additional funding beyond monthly contribution | Employer bears risk but can use accommodation to smooth cash flow |
| Refund Potential | None | Possible if claims run below expected | Yes – savings remain with employer |
| Compliance/Reporting | Minimal (carrier handles) | Some reporting handled by carrier/TPA | Employer responsible for ERISA compliance, SPD updates, RxDC, etc. |
| Stop-Loss Protection | Built into premium | Included in monthly contribution | Purchased separately – customizable |
| Plan Design Flexibility | Low | Moderate | Highest – fully customizable |
Which Health Plan Funding Option Is Right for Your Organization?
Choose Level-Funding If:
- You are a small to mid-sized employer seeking predictability
- You want capped monthly liability with no surprise costs
- You still want the opportunity to receive refunds if claims run favorably
- Your organization is new to alternative funding strategies
Choose Self-Funding If:
- Your organization has stable claims history and predictable utilization
- You have sufficient cash flow to handle month-to-month claim fluctuation
- You want maximum control over plan design and customization
- You’re prepared to handle ERISA compliance and federal reporting requirements
- You’re seeking long-term cost savings and transparency
Schedule a consultation to determine the best funding strategy →
How Memberly Helps Employers Choose the Right Funding Model
At Memberly, we guide employers through every aspect of plan design — from level-funded programs to fully self-funded plans with customized stop-loss arrangements. We help employers model multiple funding scenarios (100%, 75%, 50% funding levels) and quantify the risk/reward trade-offs for each option.
Our Strategic Approach Includes:
Claims Analysis and Forecasting: We analyze your historical claims data to project future costs accurately and identify opportunities for savings.
Cash-Flow Modeling and Accommodation Review: We help you understand monthly funding requirements and structure accommodation arrangements that protect cash flow.
Stop-Loss Negotiation: We negotiate both specific and aggregate stop-loss coverage to secure optimal protection at competitive rates.
Employee Education and Compliance Support: We ensure your team understands the plan and that you remain compliant with federal requirements including RxDC reporting, PCORI fees, and ERISA documentation.
Goal: Minimize cost volatility, protect employees with quality coverage, and maximize savings over time.
Ready to Explore Level-Funded or Self-Funded Health Plans?
Memberly helps employers evaluate funding strategies, model level-funded and self-funded scenarios, and ensure compliance with federal reporting requirements such as RxDC. Our team provides strategic plan design, stop-loss negotiation, and employee education to make the transition seamless and cost-efficient.
Visit our self-funded PPO plans page to learn more →
Memberly Benefits | Strategic Health Plan Design and Alternative Funding Solutions
