Every level funded proposal leads with the surplus refund. It is the least important number in the document. The refund describes your good year. What decides whether level funding was a smart move is your bad year: what the renewal does after a large claim, who gets lasered, and what you owe on the way out. Those terms sit on page nine. Nobody puts them in the pitch.
This is not an argument against level funding. It is often the right call. Just read the contract in the right order.
Why so many small employers are already in one
Level funding is no longer niche. KFF’s 2025 Employer Health Benefits Survey found 37% of covered workers at firms with 10 to 199 workers are in a level funded plan. It separately reports 27% at those firms in plans that are self funded, and the two figures overlap: 51% are in one or the other. KFF describes the structure as a relatively small self funded component combined with stop loss insurance that transfers a substantial share of risk to an insurer.
The appeal is mechanical. In the fully insured small group market (employers with 1 to 50 employees, or up to 100 where a state has extended the definition), 45 CFR 147.102 lets a carrier vary your premium on four factors only: age within a 3:1 band, geographic rating area, family size, and tobacco use within 1.5:1. Your claims do not count. KFF points out the difference directly: level funded plans use health status in rating and underwriting, and they are not required to provide all of the essential health benefits that insured plans must cover.
Read that sentence twice. A younger, healthier group gets priced on its own risk instead of subsidizing the community pool. A group with a serious diagnosis in it gets priced on that too. Both outcomes come from the same feature.
1. What happens to our renewal after a bad claims year?
Start here. Not with the refund.
A fully insured small group renewal cannot move because one employee got sick. A level funded renewal can. Ask for the renewal rate cap in writing, if one exists. Ask whether it covers the claims fund and the stop loss premium, or only one. Ask what the carrier’s underwriting guidelines say about a group of your size with one claimant over $100,000.
Then ask the question behind the question. If year two prices badly, can we go back? In the small group market the answer is generally yes, because 45 CFR 147.104 requires guaranteed availability of coverage. There is a catch. A carrier may apply its minimum contribution and participation rules outside an annual window running November 15 through December 15. Know that window before you need it.
2. Will anyone be lasered, now or at renewal?
A laser sets a higher stop loss deductible, or excludes coverage entirely, for one named individual with a known condition. It lowers your premium on paper. It also moves that person’s cost straight back onto your company.
Ask for a written no new laser at renewal provision. Some contracts offer it. Without it, the carrier can price year one attractively and laser your highest cost employee at the first renewal, exactly when you can least afford to walk.
3. Where are the attachment points, and who set them?
There are two. The specific attachment point is the claim amount per person above which stop loss pays. The aggregate attachment point is the total claims level for the whole group above which stop loss pays.
Lower specific attachment means more protection and a higher premium. Aggregate attachment is a percentage of expected claims, and expected claims is the carrier’s own projection. So ask how it was built: manual rates, your experience, health questionnaires or a blend. No answer means you cannot judge the corridor.
Some states set floors here. New Jersey’s small employer statute, N.J.S.A. 17B:27A-17, requires that any aggregate attachment point on stop loss sold to small employer self funded arrangements be no less than 125% of expected claims per plan year, alongside a per person minimum. Floors like that keep a thin stop loss contract from posing as insurance.
4. How is the surplus calculated, and what strings are attached?
Now the refund. Get four answers.
- What is the split? All of the unused claims fund, or a percentage.
- When is it paid? Surplus is normally determined only after run out, so it arrives months after the plan year closes.
- Is it contingent on renewing? Some contracts pay the surplus only if you stay, or apply it as a credit against next year. That is a retention tool dressed up as a refund.
- Is a deficit ever carried forward? It should not be in a true level funded product. Confirm it in writing.
We publish no average refund figure. Nobody has a reliable one. A vendor quoting a typical savings percentage is quoting marketing.
5. What do we owe if we leave?
Employers skip this one most. It costs the most.
Claims keep arriving after your plan year ends, because providers bill late. Stop loss contracts define which claims they cover using two periods: when the claim was incurred and when it was paid. A 12/15 contract covers claims incurred over 12 months and paid within 15, giving three months of run out. A 12/12 contract gives none. If you terminate, claims incurred in December and paid in February may fall outside the contract entirely.
The fix is a terminal liability provision, which extends coverage for run out claims when the plan ends. It usually has to be elected when the contract starts, not when you decide to leave. Ask for it at signing. Ask what it costs. Ask whether the carrier holds back any part of the claims fund at termination to pay run out.
6. Is level funding even legal for us, in our state, at our size?
Do not assume it. Two of the largest small group states are strict.
New York prohibits the sale of stop loss insurance to groups subject to community rating under Insurance Law sections 3231(h) and 4317(e). When New York expanded its small group definition to 100 employees on January 1, 2016, groups with 51 to 100 employees fell under that prohibition. Chapters 588 and 589 of the Laws of 2015 grandfathered groups that already had self funding with stop loss on January 1, 2015, but only while that coverage stays in force, and the exception is currently set to expire on December 28, 2028. Drop it and it is gone.
New Jersey permits it but sets the minimum attachment points described above. Other states have their own floors or disclosure rules. A proposal that ignores your state is a proposal written for a different state.
Multi state employers need this checked in every state. It is one reason a PEO master plan sometimes wins for distributed teams.
7. Who is the plan fiduciary now, and what compliance moves to us?
On a fully insured plan the carrier carries most of the regulatory weight. On a level funded plan your company is the sponsor of a self funded ERISA plan, and several obligations land on you.
- PCORI fee. Self funded plans, including level funded plans, pay it directly on IRS Form 720, due July 31. The IRS set it at $3.84 per covered life for plan years ending on or after October 1, 2025 and before October 1, 2026.
- Form 5500, generally once the plan has 100 or more participants at the start of the plan year.
- Plan document and summary plan description that match the stop loss contract. Gaps between those two documents are where denied stop loss reimbursements come from.
- The annual gag clause attestation to CMS, due December 31.
A good administrator handles the paperwork. The legal responsibility stays with you.
So when does level funding actually make sense?
Usually when three things are true. Your census skews younger or healthier than your community rate assumes. You have no known large claimant, or you have negotiated a firm no laser provision. And you can absorb a surplus that arrives late, or never, without it changing a budget decision.
It rarely makes sense with a known serious ongoing condition, a state that restricts stop loss at your size, or leadership that will treat a bad renewal as a crisis. Price it against fully insured and the PEO market on one census first. Our level funded plan comparison does exactly that.
Frequently asked questions
What is a level funded health plan?
A self funded health plan with a fixed monthly payment. The payment covers administration, stop loss insurance and a claims fund. If claims come in under the fund, some or all of the surplus may be returned. KFF describes it as a relatively small self funded component combined with stop loss insurance that transfers a substantial share of risk to an insurer.
Is level funding the same as fully insured?
No. Fully insured small group plans are rated only on age, geography, family size and tobacco under 45 CFR 147.102. Level funded plans are underwritten on health status and, per KFF, are not required to provide all of the essential health benefits that insured plans must cover.
Can a company leave a level funded plan and go back to fully insured?
Generally yes. 45 CFR 147.104 requires guaranteed availability in the small group market, although a carrier may enforce minimum contribution and participation rules outside the annual November 15 to December 15 window. Plan for run out claims before leaving by electing terminal liability coverage at the start of the contract.
What is lasering in a level funded plan?
A laser sets a higher stop loss deductible, or excludes stop loss coverage, for a specific individual with a known high cost condition. It lowers premium and shifts that person’s claims cost back to the employer. Ask for a written provision barring new lasers at renewal.
Is level funding allowed in New York?
New York prohibits selling stop loss insurance to community rated groups under Insurance Law sections 3231(h) and 4317(e), which since January 1, 2016 includes groups with 51 to 100 employees. Groups that had self funding with stop loss on January 1, 2015 were grandfathered while that coverage remains in force, an exception currently set to expire on December 28, 2028.
Do level funded plans pay the PCORI fee?
Yes. The employer sponsor of a self funded plan, including a level funded plan, reports and pays it on IRS Form 720 by July 31. The rate is $3.84 per covered life for plan years ending on or after October 1, 2025 and before October 1, 2026.
Get a level funded quote read before you sign it
Send the proposal and a census. We will price it against fully insured options and the PEO market on one model, and flag the renewal, laser and run out terms in plain English. No fee to your business.