When selecting health insurance, businesses have numerous options, and one that’s gaining traction is level funded health insurance. Level funded plans are designed to give employers more control over health care costs by allowing them to pay a fixed monthly amount that covers both claims and administrative fees.
Unlike traditional plans, where you pay the same premium no matter what, level funded insurance gives you more flexibility. If your team stays healthy and the claims are low, you could get a refund at the end of the year—who wouldn’t want that?
A level funded plan is ideal for small to mid-sized employers who want more flexibility in their health benefits while keeping their financial risk in check. Companies with a generally healthy workforce, especially those that promote wellness programs, are well-suited for this plan because of the potential to pay fewer claims.
Key Components of Level Funded Health Insurance
In level funded health plans, a fixed monthly payment covers several key components, including expected claims, administrative services, and stop-loss insurance. This fixed amount makes budgeting easier, as employers can plan for a consistent cost every month. A claims fund is set up to pay employee claims, and if those claims fall below the expected level, the employer may receive a refund.
Stop-loss insurance is a critical safeguard in these plans, protecting employers from higher-than-expected claims by covering any excess. Additionally, administrative services, often handled by a third party administrator, take care of other tasks like processing claims and ensuring compliance with federal law, making the plan manageable for employers.
How Level Funded Health Insurance Works
The structure of a level funded health plan gives employers the confidence of predictable costs with the possibility of savings. Each month, the employer pays a fixed amount that includes contributions to the claims fund, administrative fees, and stop-loss coverage. As employees submit claims, those costs are paid directly from the claims fund. If the claims are fewer than expected, any surplus at the end of the year is refunded to the employer.
This level of transparency and potential for cost savings is why many businesses find level funded health insurance a better fit than traditional plans. When transitioning from a traditional fully insured plan to a level funded model, businesses enjoy more control over their health care costs while still maintaining quality health benefits for their employees.
Advantages of Level Funded Health Insurance
Imagine you’re running a mid-sized company and need to keep your budget steady throughout the year. With level funded health insurance, each month you pay the same predictable amount, so there’s no surprise costs when employees make claims. Even if several employees have unexpected medical needs, your costs stay consistent, allowing you to manage your business finances more easily. At the end of the year, if your employees didn’t file as many claims as expected, you can even get some money back—an added financial bonus.
Flexibility is also a big perk. Want to add wellness programs to your plan? You can do that easily with a level funded health plan, tailoring it to fit your company’s needs. Plus, you get insights into how employees use their benefits, helping you make smarter choices for future health programs.
Disadvantages and Risks of Level Funded Health Insurance
Let’s say you’re running a small business and have just switched to a level funded health plan. Your staff might not be familiar with this new plan, and you’ll need to explain how it works—something that could cause confusion if they’re used to a simpler setup.
Now, imagine having to keep track of all the claims being submitted, ensuring payments come from the claims fund, and making sure everything is in line with federal regulations. This administrative load can add a layer of complexity, especially if you don’t have a dedicated HR team to handle it. These tasks can pull you away from focusing on your core business operations. However, this is where an insurance broker or third party administrator (TPA) can step in to manage these tasks for you, making the process much smoother and easier to handle.
Level Funded Health Insurance vs. Self-Funded Insurance
With a self-funded plan, you essentially pay for your employees’ healthcare costs as they come in. If one employee has an unexpected surgery or another requires ongoing treatments, you’re responsible for those bills. While this can work for some companies, the financial risk is entirely on you, which can make budgeting tricky.
On the other hand, with a level funded health plan, your costs are more predictable because there’s stop-loss insurance built into the plan. This stop-loss limits how much you have to pay if claims get higher than expected, providing a financial safety net.
When it comes to costs, self-funded plans can be more affordable upfront since you only pay for what you use. However, if claims are higher than anticipated, those costs can quickly spiral out of control. Level funded health insurance offers more stability with fixed monthly payments, making it easier to budget for healthcare expenses. Although level funded plans might seem more expensive on paper, the protection they offer through stop-loss insurance and potential refunds on unused claims can make them a more affordable option in the long run.
Level Funded Health Insurance vs. Fully Insured Plans
With fully insured plans, you pay a fixed premium to the insurance company, and they take on all the financial risk. For example, if one of your employees has a major medical event, you’re not on the hook for paying that claim directly—the insurance carrier covers it. This makes fully insured health plans easy to manage, as you just pay the premiums and let the insurance company handle everything. However, you don’t get any refunds if your employees make fewer claims than expected, and all the potential savings go to the insurer.
Level funded plans, on the other hand, give employers more control by letting them partially self-insure. You fund a claims account, and if your employees don’t use all the allocated funds, you can get a refund at the end of the year.
Customizing a Level Funded Health Insurance Plan
With a level funded plan, you have the flexibility to tailor benefits that address those specific needs. If many of your employees are young and health-conscious, you might choose to incorporate benefits like mental health support or gym memberships to keep them engaged. Conversely, if your workforce is older, you might include more comprehensive preventive care options.
Working with a Third-Party Administrator (TPA) can make the process even smoother. TPAs handle much of the administrative work, from processing claims to ensuring compliance with federal regulations. TPAs can also assist in customizing wellness programs and incentives that encourage healthier lifestyles, reducing the number of claims filed.
Legal and Regulatory Considerations
Since level funded plans are governed by the Employee Retirement Income Security Act (ERISA), they are not subject to state insurance laws, unlike fully insured plans. This means that as an employer administering a level funded plan, you won’t be seen as operating an insurance business under state regulations. However, the responsibilities don’t end there.
You’ll still need to ensure compliance with several federal regulations, including ERISA, the Health Insurance Portability and Accountability Act (HIPAA), and the Affordable Care Act (ACA). These laws place additional compliance requirements on you as the plan sponsor.
How to Evaluate if Level Funded Health Insurance is Right for Your Business
Before choosing level funded health insurance, it’s essential to evaluate your employees’ health needs. If your workforce is relatively healthy and doesn’t frequently use their healthcare benefits, a level funded plan could be a good fit. The opportunity to receive refunds for unused claim funds could offer your business significant savings. However, if your employees often require medical care, you’ll need to factor in whether the stop-loss coverage is enough to protect against high claims.
Budgeting is another key consideration. Level funded health plans provide predictable costs through fixed monthly payments, but you’ll want to forecast how much risk you’re comfortable taking. If your business prefers more stability in costs and the possibility of a refund, level funding might be the way to go.
Consulting with an insurance broker is an effective way to understand whether level funded health insurance is the right choice for your company. A broker can help analyze your workforce demographics, claims history, and financial goals to recommend the most suitable plan.
The Future of Level Funded Health Insurance
As healthcare legislation evolves, level funded health insurance is likely to adapt along with it. Changes in the Affordable Care Act or other regulations could impact how these plans are structured and what compliance requirements businesses will face. Staying informed about new laws will be critical for employers who want to ensure their plans remain compliant and beneficial.
In terms of innovations, stop-loss insurance is expected to become more advanced, offering businesses greater protection and flexibility. As more businesses look for ways to control healthcare costs while offering quality benefits, it’s predicted that the market for level funded plans will continue to grow. Mid-sized and even smaller businesses may increasingly adopt this model as they seek more control over their health insurance spending while mitigating risks.
Finding the Right Balance for Your Business
Level funded health insurance offers a flexible and cost-effective solution for businesses looking to balance predictable costs with the potential for savings. By tailoring the plan to fit your employees’ needs and taking control over how claims are managed, you can make smarter decisions about your company’s healthcare.
Whether you’re a small business or a mid-sized employer, consulting with a broker can help you evaluate if this plan is the right fit for your unique situation. As healthcare continues to evolve, level funded insurance provides an innovative way to manage costs while maintaining quality benefits for your employees.
