Most small and mid-size employers assume the advantages of self-funding a health plan are out of reach — reserved for large companies with the claims volume and cash reserves to absorb the risk. Level-funded plans were built specifically to prove that assumption wrong.
This guide walks through how a level-funded plan actually works, why the refund mechanism surprises most employers who’ve never encountered it, and the detail worth asking about before you enroll.
How a Level-Funded Plan Works
A level-funded plan is designed to combine a fully insured plan’s predictability with some of self-funding’s potential upside. It breaks down into four parts:
Fixed Monthly Payment. The employer pays a level, predictable amount each month — similar in feel to a traditional fully insured premium, which is part of what makes level-funding approachable for employers used to that structure.
Claims Fund. A portion of that monthly payment goes into a fund earmarked specifically for paying employee health claims as they come in throughout the year.
Stop-Loss Protection. Built-in stop-loss insurance caps the employer’s exposure if claims run higher than expected in a given year — this is the piece that keeps risk manageable compared to traditional self-funding.
Possible Refund. If claims come in below the funded amount for the year, the surplus is often returned or credited to the employer. This is the feature most employers have never experienced with a traditional fully insured plan.
Why This Matters More Than Most Employers Realize
According to the 2025 KFF Employer Health Benefits Survey, 37% of covered workers at small firms — those with 10 to 199 employees — are now enrolled in level-funded plans. That access didn’t really exist for smaller employers until fairly recently. Before level-funding became widely available, the choice for most small and mid-size companies was effectively binary: fully insured, or nothing.
That matters because it means a meaningful number of employers currently on a standard fully insured plan may not have ever been offered — or asked about — an alternative that could offer real savings potential without the full risk exposure of traditional self-funding.
The Biggest Misconception: “It’s Just Self-Funded With Extra Steps”
This assumption undersells what level-funding is actually designed to do. Level-funded plans are built specifically to cap an employer’s risk through built-in stop-loss protection, while keeping monthly costs predictable in a way that feels much closer to a fully insured plan than to traditional self-funding.
Put simply: level-funding is a genuine middle ground, not a repackaged version of self-funding with more paperwork. It’s designed for employers who want a shot at the savings potential self-funded groups sometimes see, without taking on the full financial risk that comes with it.
The Detail Most Employers Overlook
Here’s something worth knowing before enrolling in a level-funded plan: the refund mechanism — arguably the plan’s signature feature — varies meaningfully by carrier.
Some carriers return the full surplus to the employer. Others credit it toward the following year’s premium. Some structure it as a straightforward calculation; others attach conditions. Because most employers have never had a health plan return money before, it’s easy to assume all level-funded plans handle this the same way. They don’t.
This is one of the first things worth asking about before enrolling: exactly how, when, and under what conditions does this particular plan return a surplus, if claims come in favorably?
Signs It Might Be Time to Consider Level-Funding
Most employers don’t reevaluate their health plan’s funding structure often. But there are a few moments worth a second look:
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Premiums increased significantly at the last renewal
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You’ve never seen a refund on your current plan
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Your team has grown past roughly 10 to 15 employees
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You’re curious about self-funding but want less risk exposure
None of these guarantee level-funding is the right fit. They’re simply good reasons to ask the question before assuming the current plan is the only option.
Parker’s Perspective
The pattern I see most often is employers who assume they’re too small for anything other than a standard fully insured plan — and never actually ask what else is available. Level-funding exists specifically to serve that gap between “fully insured” and “self-funded,” and a lot of employers who’d genuinely benefit from it have simply never had the option explained to them.
That’s really the value of asking the question at renewal: not assuming the standard option is the only one, just checking what else actually fits your situation.
Questions about whether level-funding makes sense for your company? I’d be happy to take a look and walk you through what it would actually mean for your plan.
Employee Benefits Advisor
This article is intended to educate — not replace professional advice or the terms, conditions, and exclusions of any insurance plan. Every company is different, and benefits decisions should be made after considering your organization’s specific operations, workforce, and circumstances.
Clients First Insurance advises. The client decides.
