Author: Christian DiVito

For employers navigating the complex world of employee health benefits, finding the right plan can feel overwhelming. Traditional fully insured plans are often the default choice, but alternative models like level-funded insurance and captive health insurance have gained traction in recent years. 

Both options promise cost-saving opportunities and greater flexibility, making them appealing for businesses looking to optimize their healthcare spending.

Understanding the key differences between these two models is essential for employers who want to make an informed decision. Whether you’re managing a small business or a larger organization, knowing how these plans work and what they offer can help you tailor your approach to employee health coverage while maintaining control over costs.

What is Level-Funded Insurance?

Level-funded insurance is a cost-saving model that blends elements of traditional fully insured plans with self-funded insurance. Designed to provide predictability and flexibility, this type of health plan involves fixed monthly payments that cover three core components: administrative fees, claims funding, and stop-loss insurance.

Here’s how it works: Employers pay a set amount each month, with part of the payment allocated to a claims reserve fund. This fund is used to cover employees’ medical claims as they arise. 

To protect businesses from unexpected high costs, stop-loss insurance kicks in when claims exceed a predetermined limit. This feature ensures that employers are not financially burdened by excessive claims, making level-funded insurance a safer option for businesses compared to traditional self-insurance.

Pros of Level-Funded Insurance

• Cost Predictability: Fixed monthly payments make budgeting easier and reduce financial uncertainty.
• Potential Refunds: Employers may receive a refund if the claims fund has a surplus at the end of the plan year.
• Stop-Loss Protection: Safeguards businesses against high claims, ensuring unexpected costs don’t derail budgets.
• Transparency: Clear separation of administrative fees, claims funding, and stop-loss coverage allows for better understanding and control of expenses.
• Flexibility for Small Businesses: Offers an affordable option for small businesses, particularly those with a healthier workforce.

Cons of Level-Funded Insurance

• Limited Suitability: May not be ideal for businesses with a higher-risk employee population due to increased costs.
• Complexity: Requires careful management and tracking of claims utilization compared to fully insured plans.
• Refund Conditions: Not all employers will qualify for a surplus refund, especially if claims utilization is high.
• Coverage Limitations: These plans are not required to follow state-mandated benefits, which means certain benefits may not be covered.

What is Captive Health Insurance?

Captive health insurance is a self-insurance model where multiple employers come together to form a risk-sharing pool. This pool, often referred to as a “captive,” allows businesses to collectively manage healthcare costs while retaining more control over their insurance plans. 

Employers in a captive contribute funds to cover claims and administrative costs, much like level-funded plans, but with the added benefit of shared risks and potential cost savings across the group.

The structure of captive health insurance offers customized coverage, enabling employers to tailor plans based on the unique needs of their workforce. By participating in a captive, businesses can leverage the combined purchasing power of the group to negotiate better rates for services and manage healthcare expenses more effectively. This model is particularly appealing for organizations seeking long-term cost stability and the ability to invest in proactive healthcare initiatives.

Pros of Captive Health Insurance

• Shared Risk: Pooling with other employers reduces the financial impact of high-cost claims.
• Customized Coverage: Plans can be tailored to the specific needs of participating businesses and their employees.
• Potential Savings: Long-term cost savings are achievable through proactive healthcare management and reduced reliance on traditional insurance carriers.
• Greater Control: Employers gain more influence over plan design, provider networks, and wellness initiatives.
• Transparency: Direct access to claims data provides insights into healthcare usage and cost drivers.

Cons of Captive Health Insurance

• Initial Costs: Higher upfront investment is required to join and establish a captive program.
• Complexity: Managing a captive involves more administrative oversight and expertise than traditional plans.
• Group Dependency: The success of the model relies on the health and claims history of all participants in the captive pool.
• Long-Term Commitment: Captive plans often require a multi-year commitment, which may not suit businesses with uncertain growth trajectories.
• Eligibility Restrictions: Smaller businesses may face challenges meeting the entry criteria for some captive programs.

Cost Considerations for Employers

When comparing level-funded insurance and captive health insurance, understanding the cost dynamics of each model is vital. Both offer opportunities for savings compared to traditional fully insured plans, but they differ significantly in terms of upfront expenses, ongoing premiums, and how claims data influences overall cost-effectiveness.

Initial Costs

• Level-Funded Insurance: As mentioned, employers typically pay a fixed monthly premium that includes administrative fees, claims funding, and stop-loss coverage. This structure allows businesses to avoid significant upfront expenses, making it an accessible option for small to mid-sized organizations.
• Captive Health Insurance: Joining a captive often involves a higher initial investment. Employers contribute to a shared pool, and additional setup costs may apply, such as fees for establishing the captive or hiring specialized administrators.

Ongoing Premiums and Adjustments

• Level-Funded Insurance: Premiums remain stable throughout the year, providing cost predictability. At the end of the term, surplus funds from the claims reserve may be refunded, but higher claims could result in increased rates during renewal.
• Captive Health Insurance: Costs fluctuate based on the overall claims performance of the captive group. While this model offers potential long-term savings, participating employers must be prepared for claims-driven adjustments that impact future contributions.

Claims Data and Cost Efficiency

• Level-Funded Insurance: Stop-loss insurance mitigates the financial impact of high-cost claims, offering protection but less direct insight into utilization.
• Captive Health Insurance: Participants in a captive benefit from detailed claims data, enabling them to identify trends, manage healthcare costs more effectively, and implement targeted wellness programs. This transparency enhances funding efficiency and allows employers to take a proactive approach to cost management.

Potential Savings

• Level-Funded Insurance: While savings can be achieved through refunds if claims are low, the more significant savings come from reduced premiums. Level-funded plans typically offer businesses around 25% savings on premiums, making them a cost-effective choice for many employers. 
• Captive Health Insurance: By pooling risks and leveraging shared funding structures, captives can deliver long-term cost benefits. However, the success of these savings depends on the overall health and claims performance of the group.

Choosing the Right Plan for Your Business

Deciding between level-funded insurance and captive health insurance depends on factors like company size, claims history, budget, and risk tolerance. Small to mid-sized businesses often favor level-funded plans for their predictable costs and simpler structure. Larger organizations or groups may find captive insurance more appealing for its shared risk and potential long-term savings.

Your claims history and budget are key considerations. Level-funded plans suit businesses with stable claims and a need for cost predictability, while captive insurance requires a higher upfront commitment but offers greater customization and control.

Consulting with a health insurance broker or expert can help you evaluate these options and determine the best fit for your business needs, ensuring a plan that balances employee well-being and financial stability.

Making the Right Choice for Your Business

Choosing between level-funded and captive health insurance isn’t about picking the “best” option—it’s about finding what’s right for your business. By understanding their key differences, weighing the pros and cons, and considering factors like budget, risk tolerance, and claims history, you can make an informed decision that supports both your employees and your bottom line. 

Take the time to explore these options with a broker or expert, and you’ll be well on your way to crafting a health plan that works as hard as you do.

Level-funded health plans have become a popular option for businesses seeking cost-effective ways to provide health benefits. Combining the financial predictability of fully insured plans with some of the cost advantages of self-funded plans, these plans offer a middle ground that appeals to many employers. 

However, understanding the tax implications of level-funded health insurance plans is crucial for businesses, particularly HR professionals and small business owners. This knowledge can guide better decisions about structuring health insurance benefits while ensuring compliance with tax laws and maximizing financial savings this 2025.

What Are Level-Funded Health Insurance Plans?

Level-funded health plans are a hybrid approach to health insurance, blending features of both fully insured and self-funded plans. With these plans, employers pay a fixed monthly amount that covers administrative expenses, stop-loss insurance, and a claims reserve.

The claims reserve is used to pay for actual employee medical claims, and any unused funds may be refunded at the end of the year. To protect against unexpectedly high claims, stop-loss coverage acts as a financial safety net, ensuring that employers aren’t overwhelmed by large medical bills.

For small and medium-sized businesses, level-funded plans offer an attractive balance of cost savings and predictability. Employers benefit from the transparency of claims costs and the potential for refunds, while employees enjoy comprehensive health coverage. Additionally, these plans provide financial predictability, making them a practical matter for businesses seeking to manage healthcare expenses efficiently.

Tax Benefits of Level-Funded Health Insurance Plans

One of the key advantages of level-funded health insurance plans is the potential for tax savings. For employers, these plans can provide a range of financial benefits that extend beyond predictable costs and healthcare flexibility.

• Tax-Deductible Premiums and Administrative Costs: Payments made toward premiums and administrative tasks are generally tax-deductible, reducing the business’s taxable income and easing the financial burden.
• Surplus Refunds and Tax Implications: If claims are lower than expected, the employer may receive a surplus refund. While these refunds enhance cost savings, they may be treated as taxable income, depending on IRS guidelines.
• Lower Taxable Income Through Employer Contributions: Contributions to employee health plans reduce taxable income, providing businesses with significant tax savings while supporting employee well-being.

These tax benefits, combined with the cost predictability of level-funded plans, make them an excellent option for businesses looking to optimize their financial strategy while maintaining robust health coverage.

Compliance Considerations and IRS Regulations

Employers offering level-funded health plans must adhere to specific compliance requirements and IRS regulations. Understanding these obligations is essential to avoid penalties and ensure smooth operation.

IRS Reporting for Health Plan Contributions: Employers with level-funded plans are required to report contributions and claims fund details through annual tax filings. These filings, such as Forms 1095-B and 1094-B for non-ALEs (Applicable Large Employers), detail employee coverage and are submitted to the IRS. ALEs, typically those with over 50 full-time employees, use Forms 1095-C and 1094-C to fulfill reporting requirements.

ACA Requirements and Reporting Obligations: The Affordable Care Act mandates that both ALEs and non-ALEs sponsoring self-funded or level-funded plans file accurate tax forms. Non-ALE employers must report enrollment information, even if they mistakenly believe they are exempt. These filings ensure compliance with ACA rules and help the IRS determine individual eligibility for health insurance tax credits.

Penalties for Non-Compliance: Failure to file accurate ACA tax forms can result in significant federal penalties. Non-compliance with reporting obligations, such as furnishing statements to employees or submitting required forms to the IRS, can attract fines that are separate from the shared responsibility penalties for ALEs.

Employers must remain diligent in completing and distributing ACA filings each year, including ensuring that employees receive copies of relevant forms. Additionally, smaller businesses with fewer than 250 filings can take advantage of IRS allowances for manual filing but are encouraged to e-file for efficiency.

Managing Surplus Funds and Tax Implications

Surplus refunds from level-funded health plans can be a valuable financial benefit for employers, but they come with specific tax considerations. As mentioned, if the claims fund has unused money at the end of the plan year, the employer may receive a refund. The IRS typically treats these refunds as taxable income unless the funds are directly reinvested into the health plan.

To maximize tax advantages, employers should plan how to allocate surplus funds effectively. Options include using the refund to reduce future premiums, reinvesting it in employee health benefits, or covering administrative costs.

Tax Implications for Employers and Employees

The tax implications of level-funded health plans vary depending on whether you’re an employer managing the plan or an employee benefiting from it. Employers can capitalize on deductions for premium payments, administrative costs, and contributions to employee health benefits, which effectively reduce taxable income and support overall financial health. This makes level-funded plans particularly appealing for small and medium-sized businesses seeking cost-effective ways to provide robust health coverage.

For employees, pre-tax contributions toward health premiums lower their taxable income, making comprehensive healthcare more affordable. Additionally, these plans often mimic fully insured plans, meaning employees receive predictable coverage without the complexities of traditional self-funded plans.

Common Tax Pitfalls to Avoid

Managing the tax aspects of level-funded health plans requires careful attention to detail. Mistakes can lead to penalties, audits, and financial losses, so it’s important for employers to be proactive in avoiding common pitfalls. Here are some common pitfalls and how to avoid them:

• Reporting errors on ACA forms, such as Forms 1095-B and 1094-B, can lead to penalties if information is incomplete or inaccurate.
• Mishandling surplus refunds may create unexpected tax liabilities, so proper documentation of their use is essential.
• Failing to distribute required forms like Form 1095-B to employees on time can result in fines.
• Overlooking ACA filing obligations, especially for small businesses with level-funded plans, can cause compliance issues.

To mitigate these risks, employers should maintain accurate records, consult tax professionals for guidance, and use reliable third-party administrators to manage the administrative tasks associated with level-funded plans. Taking these steps ensures compliance and minimizes the likelihood of IRS audits or penalties.

Steps to Maximize Tax Benefits of Level-Funded Plans

To make the most of the tax benefits offered by level-funded health plans, businesses should take a strategic and collaborative approach. Working with brokers or third-party administrators (TPAs) can significantly lighten the burden of tax responsibilities. These professionals handle much of the complex reporting and compliance requirements, ensuring your business stays on track with IRS and ACA regulations.

• Brokers can review plan details and identify overlooked deductions, helping businesses unlock maximum tax savings.
• TPAs manage administrative tasks such as claims fund reporting, employee statements, and surplus fund tracking, which reduces the risk of errors and penalties.
• Both brokers and TPAs stay updated on the latest compliance rules, offering peace of mind by managing tax-related responsibilities on your behalf.

In addition to relying on these experts, employers should maintain thorough documentation of expenses, premium payments, and claims reserve activity. Clear and accurate records not only support compliance but also make audits more manageable, should they occur.

With the right partnerships and proper documentation, businesses can confidently navigate the tax landscape of level-funded plans while focusing on providing valuable employee benefits.

Is a Level-Funded Plan Right for Your Business?

Level-funded health plans are a game-changer for businesses seeking cost savings, tax benefits, and financial predictability. By understanding how these plans work and staying compliant with IRS and ACA requirements, you can create a win-win for your company and employees.

Don’t leave potential savings on the table—start exploring level-funded plans and take control of your health coverage strategy today.

If you’re an employer considering a health benefits package, you may have heard about level funded insurance. This approach combines predictable costs with the flexibility to pay for actual claims, offering a unique balance between traditional fully insured and self-funded plans. For many businesses—especially small and mid-sized ones—it’s a way to control health plan costs while still providing solid employee benefits.

As level funded insurance becomes more popular, it’s natural to have questions. Maybe you’re wondering if it’s too risky, too complicated, or more costly. Let us unpack common myths and provide a clear understanding of how level funded insurance can benefit your business.

Common Myths and Misconceptions

As level funded insurance becomes more common, myths and misunderstandings often lead employers to overlook its advantages. Here are some frequent questions and level funded insurance myths—and the truth behind them:

Myth 1: Is level funded insurance the same as traditional, fully insured plans?

While both provide health benefits, level funded insurance is a hybrid approach, combining elements of both fully insured and self-funded plans. Employers pay a fixed monthly premium, but unlike traditional plans, they may receive refunds on unused funds, creating potential savings that are not typically available with fully insured health plans.

Myth 2: Can only large organizations benefit from level funded insurance?

This isn’t true—level funded insurance is designed to be accessible for small and mid-sized businesses. By allowing businesses to manage health care costs through a more controlled, partially self-funded model, even smaller employers can offer quality employee health plans without the full financial risk of self-funding.

Myth 3: Is implementing a level funded plan too complex for most employers?

For companies new to this approach, level funded plans may seem complicated. However, insurance brokers, benefit advisors, and third party administrators (TPAs) guide employers through the setup and management, simplifying the process and providing support to ensure a smooth transition.

Myth 4: Is level funded insurance more expensive than other options?

Level-funded insurance offers a practical and cost-effective solution, allowing many employers to achieve up to 25% savings while providing greater financial control and stability. With a fixed monthly cost that limits unpredictability and potential refunds on unused funds, companies often find that it provides more financial control and savings over time compared to fully insured health plans.

Myth 5: Do level funded plans carry higher financial risk?

Although some risk exists, it’s mitigated through stop loss insurance, which limits an employer’s exposure to high-cost claims. This means that while level funded plans offer self-funded benefits, employers are protected from catastrophic claims, creating a balanced risk profile. An employer will not pay more than their monthly premium, just like a fully insured plan.

Myth 6: Are employee health plans under level funded insurance lacking in benefits?

Employees in level funded plans have access to a wide range of health benefits, including preventive care and wellness incentives, comparable to those provided by traditional health insurance. Additionally, these plans often allow for more customization, aligning benefits more closely with the needs of the workforce.

Myth 7: Is level funded insurance a new or experimental approach?

Level funded insurance has been in use for years, particularly among companies looking for a flexible alternative to fully insured health plans. Its proven track record demonstrates that it is a reliable choice, with many employers successfully implementing it as part of their employee benefits.

Understanding the Facts

To fully understand the value of level funded insurance, it’s essential to separate fact from misconception. Level funded plans offer a unique combination of stability, flexibility, and potential savings that appeal to many businesses.

Fact 1: How Level Funded Insurance Works

Level funded insurance is structured as a blend between fully insured and self-funded health plans. Employers pay a fixed monthly premium that covers expected claims, administrative fees, and stop-loss insurance.

As mentioned, if claims are lower than expected, the employer may receive a refund at the end of the year. This model provides cost stability while offering the potential for savings that traditional fully insured plans may not provide.

Fact 2: The Financial Advantages of Level Funded Insurance

With level funded insurance, companies can benefit from predictable premium costs and the potential for end-of-year refunds on unused funds. Additionally, these plans may offer tax advantages, as they allow businesses to deduct certain expenses that wouldn’t apply to fully insured plans. For companies focused on controlling health care costs, level funded insurance can be a strategic choice.

Fact 3: Customization Options Available with Level Funded Plans

One major advantage of level funded insurance is the flexibility it offers in plan design. Employers can tailor the health plan to meet the unique needs of their workforce, choosing benefits and wellness incentives that promote preventive care. This customization helps businesses align their employee benefits with specific organizational goals and employee preferences.

Fact 4: The Role of Stop-Loss Insurance in Level Funded Plans

Stop-loss insurance is a key feature of level funded plans, protecting employers from significant financial losses due to high-cost claims. This insurance covers costs that exceed a set threshold, reducing the financial risk for companies. Stop-loss coverage ensures that while employers enjoy the benefits of self-funding, they have a safety net in place against higher or unexpected claims. There is not an additional cost to the stop loss insurance, it is included in the monthly premiums.

Fact 5: Regulatory Compliance and Level Funded Insurance

Level funded insurance must comply with regulations governing health plans, including the Affordable Care Act (ACA) requirements for certain benefits and protections. By working with experienced benefit advisors and third party administrators, employers can ensure they remain compliant with all relevant legal and regulatory guidelines.

Fact 6: Case Studies of Successful Level Funded Insurance Implementations

According to the Kaiser Family Foundation’s 2020 Employer Health Benefits Survey, 16% of small firms with 3 to 199 employees have adopted level funded health plans. Adoption rates are slightly higher among firms with 50 to 199 employees (17 percent), showing that businesses across different sizes benefit from this model.

Comparing Level Funded Insurance to Other Options

Understanding how level funded insurance stacks up against other types of health plans can help businesses make informed decisions. Here’s a closer look at how it compares to fully insured and self-funded plans, as well as tips on when it may be the right choice.

Level Funded Insurance vs. Fully Insured Plans

Fully insured plans are straightforward and predictable, with fixed premiums paid to the insurance carrier regardless of claims. In contrast, level funded insurance provides the stability of fixed monthly costs but includes the potential for refunds if claims are lower than expected.

While fully insured plans offer simplicity, level funded insurance offers more flexibility and potential cost savings for businesses willing to manage a slightly more involved plan structure.

Level Funded Insurance vs. Self-Funded Plans

Self-funded plans give businesses complete control over their health coverage, paying for claims as they arise. However, they come with higher financial risk due to the unpredictable nature of claims. Level funded insurance strikes a balance by offering the flexibility of self-funding with added security through stop-loss insurance.

This setup makes it a safer option for companies looking to control costs without taking on the full risk of self-funding.

When to Choose Level Funded Insurance Over Other Options

Level funded insurance may be a good choice for businesses that want a balance between cost savings and predictable expenses. Small to mid-sized companies with relatively healthy employee populations might especially benefit from this model, as they’re more likely to see refunds from unused funds.

Working with benefit advisors can help determine whether level funded insurance aligns with a company’s specific financial and coverage goals.

Implementing Level Funded Insurance

For businesses considering level funded insurance, taking practical steps can ensure a smooth and successful implementation. Begin by assessing your organization’s health care needs and budget, which will help determine if level funded insurance is a good fit. From there, consult with benefit advisors and TPAs who specialize in level funded plans to guide you through plan selection, setup, and compliance requirements.

Selecting the right partners is essential to making the most of a level funded plan. Look for experienced benefit advisors who can offer transparent pricing, administrative support, and flexible plan options. These partners will not only simplify setup but will also support ongoing plan management, ensuring the coverage meets your employees’ needs effectively.

Once the plan is in place, regular management is key to maximizing benefits and potential savings. Review claims data and plan performance periodically, and work with your partners to make necessary adjustments.

Embracing the Benefits of Level Funded Insurance

Level funded insurance provides a unique opportunity for businesses to balance cost control with flexibility in health benefits. By debunking myths, understanding key facts, and comparing options, companies can make informed decisions about whether level funded insurance is the right fit for them.

With the right approach and partners, this type of insurance offers a structured yet adaptable solution that supports employee health while helping businesses manage their bottom line. If you’re considering level funded insurance, take the time to explore how it can meet your needs—both today and as your business grows.