Level Funding Explained: A More Affordable Path to Small Business Health Insurance

Small business health insurance keeps getting more expensive. The average family premium for employer coverage reached $26,993 in 2025, up 6% in one year (KFF). Marsh expects employer health costs to climb about 8% again in 2027, even after plan changes, the steepest rise since 2003 (New York Times via GV Wire).

Level funding is a way for small businesses to offer group health coverage with a fixed monthly payment, like a fully insured plan, while keeping the main upside of self-funding: if your employees' claims come in lower than expected, you can get money back.

In this guide you'll learn how level funding works, where every dollar of your monthly payment goes, how it compares to a fully insured plan, which businesses are a good fit, and the five contract questions to ask before you sign.

What is level funding?

Level funding (or a level-funded plan) is a self-funded health plan built for small employers. You pay one predictable monthly payment, drafted by ACH, to a third-party administrator (TPA). That payment covers your expected claims, plan administration, and stop-loss insurance that caps your risk if claims run high.

This is no longer a niche option. 37% of covered workers at firms with 10 to 199 employees are in level-funded plans (KFF 2025 Employer Health Benefits Survey).

Where your monthly payment goes

1. Claims fund. The largest share. It pays your employees' medical and pharmacy claims, and it is the money that can come back to you at year end.
2. Stop-loss premium. Insurance that pays when one person's claims pass a set amount (specific stop-loss) or the whole group's claims pass an expected total (aggregate stop-loss).
3. Administration. TPA fees for claims processing, network access, member service and compliance support.

"With a fully insured plan, the money the carrier doesn't spend on your claims stays with the carrier. With level funding, you can share in it." — Grant Reeves, Bespoke Benefits

Why small businesses are moving to level funding

In most states, fully insured small-group plans are community rated. A healthy 20-person company pays rates set for a pool of many groups, including much sicker ones. Level-funded plans are underwritten on your own group, so a healthy workforce can be priced like one.

You also get visibility. Most small fully insured plans share little or no claims data. Level-funded plans typically include regular reporting, so you can see what is driving cost and plan around it.

The pressure is real for small employers specifically. Workers at firms with 10 to 199 employees face an average single deductible of $2,631, versus $1,670 at larger firms, and pay 36% of the cost of family coverage, versus 23% (KFF). Many owners are out of room to shift more cost onto employees.

Level funding vs. fully insured health insurance

"Level funding isn't automatically cheaper. It's priced on your group. For a healthy small business, that's often the most affordable way to offer real group coverage." — Grant Reeves, Bespoke Benefits

Is level funding a good fit for your business?

Strong fit if you:

• Have at least 5 to 10 enrolled employees (minimums vary by carrier and state)
• Have a generally healthy workforce with no known large, ongoing claims
• Want a fixed monthly budget and are facing a steep fully insured renewal
• Want claims data to make better benefit decisions

Proceed carefully if:

• Someone on the plan has a known high-cost condition. Underwriting uses health status, which can mean higher rates or a higher stop-loss limit for one person (a "laser").
• You need rates that won't move much year to year. Level-funded renewals reflect your own claims, in both directions.
• You assume every benefit matches your current plan. Unlike insured small-group plans, level-funded plans aren't required to cover all ACA essential health benefits (KFF). Most mainstream options do, but compare the summaries of benefits side by side.

Five questions to ask before you sign

1. What happens to the surplus? Ask what percentage is returned, when, and whether it is paid out or credited to next year. Some programs require you to renew to receive it.
2. What are the stop-loss terms? Get the specific stop-loss deductible per person, the aggregate attachment point, and the contract basis, which determines which claims count toward each year.
3. What renewal protections are included? Look for a cap on renewal increases and a "no new lasers" provision.
4. What happens if we leave? Claims incurred before you leave can arrive months later. Ask how this run-out period is handled and what it could cost.
5. What will employees experience? Confirm the provider network, who answers member calls, and how ID cards, pharmacy and prior authorizations work.

A note for accountants and HR directors

The fixed monthly payment budgets like a premium: no swings in cash flow from a bad claims month. Employee contributions can still be taken pre-tax through a Section 125 plan. Surplus refunds need care, because the share tied to employee contributions may be plan assets under ERISA. Confirm the treatment with your tax advisor or ERISA counsel before the money arrives.

The bottom line

Level funding gives small businesses the budget certainty of a fully insured plan with a path to lower costs and real claims data. It works best for healthier groups and rewards employers who read the contract. At your next renewal, ask your broker to quote both fully insured and level-funded options side by side.

Renewal coming up? Send us your current plan and renewal, and we'll quote fully insured and level-funded options side by side, with the contract terms explained in plain English.

Frequently asked questions

What is level funding in health insurance?

Level funding is a self-funded group health plan for small employers. The employer pays a fixed monthly payment that covers expected claims, stop-loss insurance and administration. If claims come in lower than expected, the employer may receive a surplus refund.

Is level funding cheaper than a fully insured plan?

Often, but not always. Level-funded plans are priced on your group's own health and claims, so healthier groups usually see lower costs than community-rated fully insured plans. Groups with known high-cost conditions may not.

What happens if our claims are higher than expected?

Your monthly payment stays the same for the plan year. Stop-loss insurance pays claims above the set limits, so the employer does not owe extra mid-year. High claims will usually affect your renewal rates.

How many employees do you need for level funding?

Many carriers start at around 5 to 10 enrolled employees, though minimums vary by carrier and state. Some states restrict level-funded or stop-loss arrangements for very small groups.

Do employees notice a difference with a level-funded plan?

Usually very little. Employees get ID cards, a provider network and member support as they would with a fully insured plan. Confirm the network includes the doctors your team uses.

Is a level-funded plan ACA compliant?

Yes. Level-funded plans are self-funded ERISA plans and follow the ACA rules for self-funded plans, including preventive care at no cost, dependent coverage to age 26 and out-of-pocket limits. They are not subject to the small-group essential health benefits mandate or community rating.

Can we switch back to fully insured later?

Yes, typically at renewal. Before switching, review how run-out claims are handled so you are not surprised by claims incurred before the change.