Level-funding is the funding structure small groups are least often shown and most often surprised by. It is worth quoting for a lot of healthy groups, and it carries obligations a fully insured plan does not.
This describes the shape of it. It states no rates, no attachment points and no surplus-share terms, because those are quote-specific and vary by carrier. And the legal question at the end is genuinely a legal question.
The three funding structures
Fully insured. You pay a fixed premium. The carrier takes the claims risk entirely. In the small-group market rates are largely community-rated, so your own claims experience has limited direct effect on what you pay.
Level-funded. You pay a fixed monthly amount that funds expected claims, plus stop-loss cover, plus administration. If the group’s claims run better than expected, a share of the surplus can come back. If they run worse, stop-loss caps your exposure.
Self-funded. You pay claims as they arrive, with stop-loss above. Real administrative burden, genuine month-to-month variability, and generally not a fit under fifty employees.
Level-funding sits between the first two and is designed to feel like the first while pricing like the second.
What “level” means
Your monthly payment is fixed, like a premium. That is the point of the name — the cash-flow experience is intended to resemble a fully insured plan.
What differs is what happens at the end of the plan year. On a fully insured plan, that is the end of it. On a level-funded plan there is a reconciliation, and the outcome depends on how your group’s claims actually ran.
The three components you are buying
The claims fund. An estimate of what your group will cost, based on your group rather than the community. This is where a healthy group does better than community rating would allow.
Stop-loss cover. Insurance against your claims exceeding the estimate. It has both a per-person and an aggregate dimension, and the levels at which each attaches are specified in the quote. Those levels are the single most important thing to read.
Administration. Someone has to process claims and run the plan. That is a fee, and it is in the monthly figure.
Surplus share
If claims come in under the funded amount, a share of the difference may be returned. How much, when, and under what conditions varies considerably between carriers — some return a proportion, some require the group to stay for a further year, some settle long after the plan year ends.
Read the surplus provisions before the premium. A quote with an attractive monthly figure and a weak surplus provision may be worth less than one that costs slightly more.
Do not budget for a surplus. Treat it as an upside that may not arrive.
What it asks of you
Medical underwriting to enter. Employees complete health questionnaires, or the carrier reviews claims data. That is a real ask, and it is why the structure suits healthier-than-average groups: the underwriting is how they demonstrate it.
Cash-flow tolerance. The monthly figure is level, but a bad year is still a worse year — the ceiling is the stop-loss, not the funded amount.
A willingness to look at claims data. You will see more about how your group uses care than a fully insured plan reveals. Some employers find that useful. Some would rather not have it, and that is a legitimate reason to stay fully insured.
A size. Typically fifteen employees and up. Below that the credibility of your own experience is too thin for the structure to do what it is meant to.
The part that needs a lawyer
Level-funded arrangements have ERISA implications that a fully insured plan may not. Plan documents, fiduciary responsibilities, reporting obligations and the treatment of plan assets can all differ.
That is not a caveat we are adding to be careful. It is the reason this page ends here rather than going further. A broker can explain the structure and get it quoted; whether it is the right arrangement for your company, and what obligations attach, is a question for your employment counsel — and if you do not have one, that is the moment to get one rather than the moment to proceed.
How to evaluate a quote
- What are the stop-loss attachment points, per person and in aggregate?
- What exactly are the surplus-share terms, and when do they settle?
- What is the administration fee, separately from the claims fund?
- What happens at renewal if the group runs badly — how much can the funded amount move?
- What happens if you want to go back to fully insured?
That last question is the one people forget. Going in requires underwriting; coming out at a bad moment can be expensive.
The short version
Worth quoting for most healthy groups from about fifteen employees up. Not worth entering without reading the stop-loss and surplus provisions properly, and not worth entering without counsel looking at the arrangement.
If your broker has never mentioned it, that is worth asking about. If they mention it without mentioning the underwriting or the ERISA question, that is worth asking about too.
General information, not advice
This describes how group benefits generally work for companies of this size in Washington, Oregon and Idaho. It is not advice about your company, and it is not legal, tax or actuarial advice.
Roster Benefits Group LLC is a licensed insurance producer and appointed broker. We are not a law firm, not a certified public accounting firm, and not a third-party administrator. Anything turning on how a law applies to your facts needs your own counsel.
