Understanding Level Funded Small Group Insurance Plans and Their Benefits

Small businesses often face challenges when choosing the right health insurance plan for their employees. Traditional fully insured plans can be costly and inflexible, while self-funded plans may seem risky and complex. Level funded small group insurance plans offer a middle ground, combining predictability with potential savings. This post explains what level funded plans are, how they work, and why they might be a smart choice for small businesses.

What Are Level Funded Small Group Insurance Plans?

Level funded insurance plans are a type of health coverage designed for small to mid-sized businesses. They blend features of fully insured and self-funded plans. Instead of paying a fixed premium to an insurance carrier, employers contribute a set monthly amount that covers expected claims, administrative fees, and stop-loss insurance.

This monthly payment stays the same throughout the year, giving businesses predictable costs. If actual claims are lower than expected, the employer may receive a refund or credit. If claims are higher, stop-loss insurance protects the employer from excessive losses.

Key Components of Level Funded Plans

• Monthly Fixed Payment

Covers estimated claims, administrative costs, and stop-loss premiums.

• Stop-Loss Insurance

Limits the employer’s financial risk by covering claims above a certain threshold.

• Claims Fund

Money set aside to pay employee medical claims as they occur.

• Potential Refund

If claims are lower than expected, the employer may get money back at the end of the plan year.

How Level Funded Plans Work in Practice

Imagine a small company with 20 employees. The insurer estimates the company’s annual claims will be $200,000. The employer pays a fixed monthly amount of $18,000, which includes:

• $15,000 for expected claims

• $2,000 for administrative fees

• $1,000 for stop-loss insurance

  
  

If actual claims total $180,000, the company has $20,000 left in the claims fund. After administrative fees and stop-loss costs, the employer may receive a refund or credit. If claims reach $220,000, stop-loss insurance covers the $20,000 excess, protecting the employer from unexpected costs.

This structure encourages employers to promote employee wellness and cost-conscious healthcare decisions, as lower claims can lead to savings.

Benefits of Level Funded Plans for Small Businesses

Predictable Monthly Costs

Small businesses often struggle with fluctuating insurance premiums. Level funded plans offer a fixed monthly payment, making budgeting easier and reducing surprises.

Potential Cost Savings

Unlike fully insured plans, level funded plans return a portion of the unused claim funds to the employer. This means businesses can save money if their employees stay healthy and use healthcare wisely.

Reduced Financial Risk

Stop-loss insurance protects employers from very high claims, limiting their exposure to unexpected medical costs.

Common Misconceptions About Level Funded Plans

• They Are Only for Large Companies

Actually, level funded plans are designed specifically for small to mid-sized groups, often with 10 to 100 employees.

• They Are Risky Like Self-Funding

Stop-loss insurance limits risk, making these plans safer than traditional self-funded options.

• They Are Complicated to Manage

Many providers offer full administrative support, simplifying management for employers.