What You Need to Know About Self-funded vs. Level-Funded Plans

The countless operational decisions you face as a business owner can be overwhelming. But when it comes to benefits and provisions for your employees, you might even feel more pressure to get it right. Of course, taking care of your teams is paramount to your business success, but so is minding your budget. And with so many healthcare concerns in today’s environment, it’s not a decision to take lightly.

When it comes to offering health insurance and related benefits, you might be on the fence about changes for the upcoming plan year. Self-insured health plans can be complicated to take on and manage. But you might be uncertain about the benefits of level-funded plans as an alternative. Today, we’ll dive into the key advantages and differences of both to help shed light on selecting just the right solution for your company and employees.

Understanding the Pros & Cons of Self-Funded Plans

As the Kaiser Family Foundation defines, the self-funded plan model provides a pay-as-you-go approach to healthcare. These can be ideal for certain sized and structured companies. Here’s what you need to know.

Definitions: In a self-funded plan, the health insurance arrangement is the primary responsibility of the employer to finance. Any claims leveraged by employees will fall to the employer to pay.

In most scenarios, companies with self-funded plans partner with third-party administrators or insurers to help with the administrative operations behind providing these coverages.

In some arrangements, self-funded plans have provisions in which stop-loss coverage decisions can be made to protect employers from substantially large claims.

In these pay-as-you-go self-funded plans, employers will pay any claims without enforcing a cap on employees’ submissions. Some years may translate to fewer claims, while others have more. While this sounds beneficial in that you’re only responsible for exact claims costs. It can be extremely difficult to project and manage the budgets. One catastrophic claim can tank a company’s budget completely.

This is where level-funded plans come into play.

Understanding the Pros & Cons of Level-Funded Plans

Level-funded plans can present unique alternatives to how your company handles healthcare costs for employees. Like self-funded plans, level-funded structures can be ideal for some business models. Here’s what you need to know.

Definitions: The level-funded plan is an arrangement that allows employers to pay a set amount each month to an insurance provider or third-party administrator to serve as a reserve of funds. This “bank” of reserves is used to process employee claims. These funds may also be allocated to cover administrative costs and stop-loss coverage premiums. Any remaining reserves available at the plan year may be refunded to the participating company.

In a level-funded plan, companies can have a better grasp of the budget preparations for the plan year. And cash flow is more stable with a monthly payment instead of the pay-as-you-go approach to covering claims.

In those scenarios where more is paid in than paid out in the given plan year, rebates can be applied to the following year’s policy. If the claims presented for the year exceed the budget or a predetermined cap per employee, the stop-loss kicks in to cover the charges. These plans can offer the peace of mind that comes with having a plan for either experience.

Key Differences, Benefits & Statistics for Both

It may be additionally helpful to also consider the data available for both types of plans. Here are the key differences to note, along with some of the latest figures about how other companies are leveraging either option. Self-funded and level-funded plans continue to grow in popularity across the board. Knowing which setup is best for your business, here’s what you need to know.

Statistics from 2020:

• Roughly 60 percent of covered employees, working with companies of three or more employees, were in partially or entirely self-funded type plans last year.
• Between 1999 and 2014, the general public percentage of people covered by a self-funded plan grew from 44 percent to 61 percent.
• In small businesses, 31 percent of participating employees were in self-funded or level-funded plans last year, a hike from the 24 percent recorded in 2019.
• In 2020, 13 percent of small businesses offered a level-funded plan, according to KFF.

Level-Funded Plans Are Different

In comparing self-funded and level-funded plans, many companies find great flexibility in the level-funded structure. For small and medium-sized businesses, the customization options offer a more affordable advantage. And because there are now ACA tax credits for businesses employing two to 49 employees, many small companies are able to provide healthcare benefits for the very first time.

The providers for level-funded plans tend to offer incredibly robust service options. The benefits are modern, including the ability for employees to choose their own doctors. Customer service for level-funded plans tends to also be dedicated, making administrative management tasks streamlined and efficient.

There is a tech-based advantage to level-funded plans, too. All the necessary apps and tools needed to process and manage claims are available, making life much easier on business owners and in-house Human Resources professionals. Having access to claim data is also a must-have benefit of the level-funded plans, allowing companies to monitor the types of claims paid and make improvements to policies moving forward.

Every business will have different needs, based on employee claims and preferences, as well as the company budget for benefits. But in general, the level-funded model tends to be a good fit for small, medium-sized, and startup businesses. Larger firms with more substantial budgets and employee numbers may find more efficient and affordable results from the fully self-funded plans.

State requirements may play a role in which types you choose, as well. Research any guidelines your home state requires in terms of applicable conditions allowing for a level-funded plan implementation.
Before deciding whether your business should adopt a self-funded plan or a level-funded plan, let W3LL help take the benefits guesswork out of making your healthcare coverage decision. We can shed light on the various advantages of all your options, including affordability, flexibility, and cost predictability for each, based on your needs.