Health insurance is more than just a box to check—it’s a vital part of attracting and retaining talented employees and ensuring their well-being. But for many businesses, especially small and mid-sized employers, finding a plan that balances affordability with quality can feel like navigating a maze and traditional plans can be too rigid or costly.
Understanding how different options like Level Funded Plans work can help you make a more informed decision that benefits everyone in your company. Level funded plans empower employers to have more control over their health care costs. They can help businesses keep health benefits affordable without compromising on coverage or quality, turning what might have been a financial headache into a strategic advantage.
Let’s explore how level funded insurance benefits the workforce and why they might be the right choice for your business.
What Are Level Funded Insurance Plans?
Level funded insurance plans combine elements of traditional, fully insured plans and self funded plans, providing a unique structure that works well for many employers. As employers pay their fixed monthly premiums, they are also contributing to a claims fund, which is used to cover the cost whenever an employee submits an eligible medical claim. Unlike fully insured plans where employers pay a fixed premium to the insurance company regardless of the actual claims, level funded plans offer more control and potential savings by aligning payments more closely with actual usage.
Compared to traditional insurance plans, level funded health plans can offer more flexibility and transparency. With level funding, employers have greater insights into their health care costs and can benefit from cost savings if claims are lower than expected. This approach also involves a structured payment system, typically with a fixed monthly fee, making budgeting easier.
Key Components of Level Funded Insurance Plans
Understanding the core elements of level funded insurance plans helps in assessing whether this option is right for your organization:
- Fixed Monthly Payments: Employers pay a fixed amount each month, which covers expected claims, stop-loss insurance premiums, and administrative fees. This predictable cost structure makes it easier for companies to budget for health benefits throughout the plan year.
- Stop-Loss Insurance Protection: To safeguard against higher-than-expected claims, level funded plans include stop-loss insurance. This coverage protects employers from the financial impact of unusually high claims by capping their maximum liability.
- Year-End Reconciliation Process: At the end of the plan year, if the claims paid out are less than the amount funded by the employer, a surplus refund may be issued. Conversely, if claims exceed the expected amount, the stop-loss insurance covers the additional costs.
- Claims Management and Risk Assessment: Level funded plans often involve a third-party administrator to handle claims payments and other administrative tasks. This allows employers to focus on their core business activities while maintaining a well-managed health plan.
Benefits of Level Funded Insurance Plans
Level funded insurance plans are becoming an increasingly popular choice for employers seeking a cost-effective approach to offering health benefits. A survey concludes 34% of small firms reported having a level funded plan in 2023, up from just 7% in 2019. This surge reflects the growing recognition of the unique advantages these plans offer, combining predictable costs with flexibility and potential savings.
Cost Predictability
Level funded plans provide the stability of fixed monthly payments, making it easier for businesses to budget for health care costs throughout the year. This structure helps reduce financial risk for employers by combining predictable payments with protection against unexpected expenses.
Potential for Cost Savings
If the total claims submitted by employees are lower than expected by the end of the year, employers may receive a refund of the unused portion of their claims fund. This opportunity for cost savings sets level funded plans apart from fully insured models.
Flexibility in Plan Design
Employers can tailor level funded plans to better meet the unique needs of their workforce. This flexibility allows for customization of coverage options, enabling businesses to provide health benefits that align with employee preferences and company goals.
Enhanced Transparency
Level funded plans offer greater access to claims data and detailed reporting. This transparency helps employers understand health care utilization trends, which can improve decision-making and better inform future plan designs.
Employee Wellness and Engagement
Incorporating wellness programs into a level funded health plan can promote healthier lifestyles among employees. These programs can help reduce overall claims, contributing to cost savings and increasing the likelihood of receiving a refund at the end of the year.
Potential Drawbacks to Consider
While level funded insurance plans offer many benefits, they aren’t without potential downsides. It’s important for employers to understand these challenges to make an informed decision.
Not Subject to State Insurance Mandates
Level-funded plans are primarily regulated by federal laws like ERISA and not subject to state insurance mandates. This means that certain benefits or protections required by your state may not be included in your plan. As a result, employees might miss out on state-mandated coverages, which could lead to gaps in their healthcare benefits compared to fully insured plans that comply with state regulations.
Complexity in Administration
Managing a level-funded insurance plan can involve additional administrative tasks, especially for businesses new to this type of coverage. Employers are responsible for handling PCORI fees, ACA reporting, and adhering to ERISA regulations. These added responsibilities can create a significant administrative burden, particularly for smaller businesses with limited resources.
Strict Participation Guidelines
Level-funded plans often come with strict participation requirements, which can be a challenge for smaller employers. These requirements usually mandate a minimum number of enrolled employees, making it difficult for businesses with smaller workforces to qualify. If a company cannot meet these participation standards, it may be excluded from taking advantage of level-funded plans altogether, potentially limiting their health plan options and cost-saving opportunities.
Who Should Consider Level Funded Insurance Plans?
Level funded insurance plans can be an excellent choice for a range of businesses, particularly those that fit certain criteria. These plans are often ideal for small to mid-sized employers who want more control over their health care costs without taking on the full risk of a self-funded model. Companies with a relatively healthy workforce or stable employee base might find level funding especially beneficial, as it allows them to enjoy potential cost savings from lower-than-expected claims.
Industries that tend to experience predictable health care usage, such as technology firms or professional services, are also well-suited for these plans. However, evaluating your company’s risk tolerance is crucial.
Comparing Level Funded Insurance to Other Plans
Choosing the right health insurance plan can be complex, and understanding how level funded plans compare to other types of coverage is essential. Here’s a look at how level funded plans stack up against the other types of health plans.
Fully Insured Plans
Fully insured plans are the most traditional type of employer-sponsored health insurance. With these plans, businesses pay a fixed premium to an insurance company, which takes on the financial risk of covering employee claims. One of the main differences between fully insured and level funded plans is who assumes the risk.
In a fully insured plan, the insurance carrier takes on all the risk, which means predictable costs for the employer but less flexibility. Level funded plans, on the other hand, offer a middle ground, providing predictable monthly payments while still allowing for potential refunds if claims are lower than expected.
Self-Funded Plans
Self-funded health plans put the employer in full control of their health care costs by paying directly for employee claims rather than paying a fixed premium to an insurer. The main distinction between self-funded and level funded plans lies in the extent of financial risk. In a self-funded model, the employer assumes all risk, which can lead to substantial savings if claims are low but significant expenses if claims are higher than expected. Level funded plans mitigate this risk with stop-loss insurance, capping the employer’s potential liability for high-cost claims.
Captive Insurance Plans
Captive insurance plans are an alternative where businesses create or join a group of employers to form their own insurance company. This approach provides greater control over premiums and claims, similar to level funded plans, but often requires significant capital and management resources. Captives can offer substantial cost savings and flexibility but come with the challenge of handling more complex regulations and administrative responsibilities.
How to Implement a Level Funded Insurance Plan
Transitioning from a traditional insurance plan to a level funded plan involves several key steps. First, employers need to assess their current health plan and determine if level funding aligns with their financial goals and risk tolerance. Working with experienced insurance brokers and consultants can also be invaluable in this process, as they can help evaluate different options and guide the transition.
Finally, it’s important to educate employees about the new plan, explaining how it works and highlighting its benefits with proper training and orientations. Clear communication helps employees understand their role in managing health care costs, fostering a positive transition and encouraging engagement with the new plan.
Navigating the Health Insurance Maze
Choosing the right health insurance plan for your business doesn’t have to feel like a gamble. With level funded insurance plans, you get the best of both worlds—predictable costs and the flexibility to potentially save big if your claims come in lower than expected. It’s like having a safety net without sacrificing control or cost efficiency.
But don’t forget, every business is unique, and what works for one might not be ideal for another. Weigh your options, assess your risk tolerance, and consider your company’s specific needs. A little research now can lead to significant savings and happier, healthier employees down the line. Ready to make the smart choice? Let’s take the next step together!
