Shopping group health for your team
For Colorado employers evaluating their group health insurance options, level-funded plans represent a fundamental shift in how employee benefits are financed. A level-funded plan is a hybrid insurance model specifically designed as a middle ground between the safety of a fully insured plan and the financial control of a self-funded plan. In this arrangement, the employer pays a fixed monthly premium that covers expected medical claims, administrative fees, and stop-loss insurance. However, unlike a fully insured plan where the insurance carrier keeps all the profit if claims run low, a level-funded plan allows the employer to receive a refund for unused claim dollars at the end of the year.
This model removes the unpredictable cash flow volatility traditionally associated with self-funding while granting employers the regulatory and financial advantages of bearing their own risk under federal law. For small to mid-sized businesses—typically those with 20 to 250 employees—level-funding offers a structural escape hatch from the rigid, community-rated pricing of the traditional group market, allowing them to finally leverage the health of their workforce to reduce overhead costs.
To understand why level-funded plans are transforming the mid-market benefits space, an employer must first look at how their monthly healthcare dollar is allocated. In a traditional fully insured plan, you pay a single, opaque premium to the insurance carrier. The carrier pools your money with thousands of other businesses, pays the claims, pays the taxes, absorbs the administrative costs, and keeps the margin. The employer has no visibility into how much of their premium actually went toward their employees’ healthcare versus carrier profit.
A level-funded plan breaks that single premium apart into three transparent, distinct buckets, while still requiring only one predictable check from the employer each month.
A significant portion of your fixed monthly payment goes directly into a dedicated claims fund. This account is actively managed by your Third-Party Administrator (TPA) or the insurance carrier acting in an administrative capacity. When your employees visit the doctor or fill a prescription, the TPA draws money from this specific bucket to pay the providers. Actuaries calculate the exact size of this bucket during underwriting based on the demographic and health data of your specific workforce.
The second component of the monthly payment covers the fixed operational costs of running a health plan. This includes fees paid to the TPA for adjudicating claims, fees for leasing a provider network (like the Cigna network or similar national/regional PPO networks), broker commissions, prescription benefit manager (PBM) fees, and compliance costs. Unlike the claims bucket, this administrative bucket is a sunk cost. It does not fluctuate based on utilization, and it is not refundable at the end of the year.
The final component of your monthly payment is the premium for stop-loss insurance. This is the financial safety net that makes level-funding viable for small and mid-sized employers. Stop-loss insurance is not health insurance for your employees; it is catastrophic liability insurance for the business itself. It protects the employer against the financial ruin that would otherwise occur if an employee required a multi-million-dollar medical treatment, or if the group as a whole experienced an abnormally high volume of claims in a single year.
Because the monthly payment combines these three elements into one uniform bill, the CFO or HR director experiences the exact same administrative simplicity as a fully insured plan. The complexity of funding the claims and paying the stop-loss premium happens behind the scenes.
Stop-loss insurance is the engine that makes a level-funded plan work. Without it, an employer would be exposed to unlimited financial liability. In the level-funded model, the stop-loss policy dictates the maximum possible exposure the employer faces, transferring all risk above that threshold to the stop-loss carrier.
To fully grasp the mechanics, employers must understand the two distinct types of stop-loss coverage that are baked into a level-funded plan: Specific Stop-Loss and Aggregate Stop-Loss.
Specific stop-loss protects the employer against a single, catastrophic claim from one individual on the plan. During the underwriting process, the employer and the carrier agree on an “attachment point” (essentially a deductible that the business pays before the stop-loss kicks in).
For example, if the specific stop-loss attachment point is set at $35,000, the employer’s claims bucket is responsible for paying the first $35,000 of medical bills for any given employee during the year. If an employee suffers a severe injury or illness resulting in $250,000 in medical bills, the employer’s liability stops exactly at $35,000. The stop-loss carrier steps in and covers the remaining $215,000. This ensures that no single catastrophic event can drain the overall claims fund.
While specific stop-loss protects against individual catastrophes, aggregate stop-loss protects the employer against a high volume of smaller, everyday claims across the entire workforce. If an unusual number of employees require minor surgeries, expensive daily medications, or extensive physical therapy, the overall claims bucket could theoretically run dry, even if no single employee ever hits the specific stop-loss attachment point.
Aggregate stop-loss steps in when the total volume of claims for the entire group exceeds a predetermined threshold—typically set at 120% to 125% of expected claims. If the actuaries predict your group will incur $500,000 in total claims this year, the aggregate attachment point might be set at $625,000 (125%). If total group claims hit $700,000, the employer is only responsible up to the $625,000 mark. The stop-loss carrier pays the rest.
A critical cash-flow protection mechanism unique to level-funded arrangements is “aggregate accommodation.” In a traditional self-funded plan, if claims spike heavily in month two, the employer has to write a massive check to cover them out of pocket, waiting until the end of the year to settle up with the aggregate stop-loss carrier.
Level-funded plans smooth this out entirely. If your employees incur heavy claims early in the plan year before your monthly payments have built up enough cash in the claims fund, the stop-loss carrier “accommodates” the deficit. They advance the funds necessary to pay the providers, meaning the employer never receives an unexpected bill. Your monthly payment remains completely fixed, transferring the cash-flow volatility back to the carrier.
| Feature | Fully Insured Plans | Level-Funded Plans | Traditional Self-Funded Plans |
|---|---|---|---|
| Claims Risk | Borne entirely by the insurance carrier. | Employer bears risk up to a cap; stop-loss covers the rest. | Employer bears risk up to a stop-loss cap, with high cash-flow variance. |
| Monthly Payments | Fixed. No end-of-year refund if claims are low. | Fixed. Employer receives a refund if claims are low. | Variable. Employer pays actual claims as they occur each month. |
| Regulatory Oversight | Subject to state (Colorado DOI) and federal mandates. | Governed by federal ERISA law. Exempt from state mandates. | Governed by federal ERISA law. Exempt from state mandates. |
| Data Transparency | Virtually zero. Carriers provide little to no claims data. | High. Employers receive detailed reports on claims utilization. | Complete. Employer owns all data and completely controls the plan. |
| Target Employer Size | 2 to 50+ employees (especially groups with poor health profiles). | 20 to 250 employees (groups with average to excellent health). | 250+ employees (large groups with capital to absorb cash flow swings). |
One of the most profound financial and structural benefits of moving to a level-funded plan is the shift in regulatory oversight.
A fully insured plan purchased in Colorado is subject to the regulatory authority of the Colorado Division of Insurance (DOI). The state legislature frequently passes laws requiring fully insured health plans to cover specific treatments, procedures, and provider types. While these state mandates expand coverage, they heavily inflate the baseline cost of insurance premiums. Furthermore, the state of Colorado levies a premium tax on fully insured health plans, a cost that the carrier automatically passes directly onto the employer through higher rates.
Because level-funded plans are legally classified as a form of self-insurance, they fall under the jurisdiction of the federal Employee Retirement Income Security Act of 1974 (ERISA).
Under the legal doctrine of ERISA preemption, self-funded and level-funded benefit plans are largely shielded from state insurance laws. By switching to a level-funded framework, a Colorado employer immediately achieves two major financial victories:
ERISA preemption is not a loophole without responsibilities. By stepping outside the bounds of the state Division of Insurance, the employer assumes the role of the plan sponsor and fiduciary under federal law.
This requires strict adherence to federal compliance standards. The employer must ensure the creation and distribution of a highly specific Summary Plan Description (SPD). They must comply with federal reporting requirements, which often include filing an annual Form 5500 with the Department of Labor and paying Patient-Centered Outcomes Research Institute (PCORI) fees. While a high-quality broker and TPA will handle the heavy lifting of this administration, the legal responsibility rests squarely on the employer’s shoulders.
The defining feature of a level-funded plan is what happens at the end of the policy year. In a fully insured plan, if you pay $500,000 in premiums for the year and your employees only utilize $300,000 in healthcare, the insurance carrier keeps the $200,000 difference as profit. In a level-funded plan, that money comes back to you.
When the 12-month plan year ends, the accounting is not finalized immediately. The healthcare industry is notorious for delayed billing; a hospital visit that occurs in December might not be billed to the TPA until February. To account for this, level-funded contracts include a “run-out” period, typically 3 to 6 months following the end of the plan year.
During this run-out period, the TPA continues to use the claims fund to pay for medical services that were incurred during the active plan year but billed late.
Once the run-out period concludes, the TPA performs a final claims audit. They compare the total amount of money deposited into the claims fund against the total amount of money paid out to doctors, hospitals, and pharmacies.
If there is a surplus, the contract dictates how much of that surplus is returned to the employer. Depending on the carrier and the specific level-funded product purchased, the refund structure typically takes one of three shapes:
It is vital to note that if claims exceed the funded amount, there is no “bill” at the end of the year. The stop-loss insurance has already absorbed the deficit. The employer’s downside risk is definitively capped at 12 months of fixed payments.
Because medical billing is delayed, employers navigating level-funding must pay close attention to the specific timeframe their stop-loss contract covers. These contracts are defined by two numbers: the first number represents the months during which a claim must be incurred (the date the medical service happened), and the second number represents the months during which the claim must be paid by the TPA.
When transitioning a business into a level-funded arrangement for the first time, ensuring the correct stop-loss contract structure is paramount to preventing catastrophic coverage gaps.
What happens if an employer utilizes a level-funded plan for two years, decides they no longer want it, and switches back to a fully insured plan? This transition requires careful navigation of a concept called “Terminal Liability.”
When you terminate a level-funded plan at the end of the year, your employees will still have outstanding medical claims that were incurred in the final months but haven’t been billed yet. Because you have cancelled the policy, the TPA and stop-loss carrier are no longer active, and your new fully insured carrier will refuse to pay for claims that happened before their policy started.
To prevent the employer from having to pay these run-out claims entirely out of pocket, high-quality level-funded plans include a Terminal Liability Reserve (TLR) or terminal liability insurance rider. A portion of the fixed monthly premium is set aside specifically to fund claims that roll in after the policy is terminated. Executive decision-makers must ensure this rider is explicitly included in their level-funded contract during the initial underwriting phase.
Entering the level-funded market requires a fundamentally different underwriting process than purchasing fully insured community-rated plans.
In the fully insured small-group market (under 50 employees), carriers are prohibited by the Affordable Care Act from asking medical questions. They must accept every group and base the premium entirely on the age, location, and tobacco use of the employees. This means healthy tech startups in Denver subsidize the costs of unhealthier manufacturing groups across the state.
Level-funded plans, being a form of self-insurance, are medically underwritten. The carrier actuaries need to know exactly how healthy your specific workforce is before they will guarantee a fixed monthly rate.
Historically, medical underwriting required every employee to fill out a lengthy, invasive Individual Medical Questionnaire (IMQ), detailing their entire health history. This administrative burden often deterred HR teams from exploring level-funding.
Today, the industry has largely shifted to GRx (Pharmacy Data) Underwriting. With the employer’s census data, the carrier performs a secure, HIPAA-compliant sweep of national pharmacy databases to review the prescription drug history of the workforce. Because prescription drugs are highly accurate indicators of underlying chronic conditions (e.g., insulin indicates diabetes, specific biologics indicate autoimmune disorders), the actuaries can accurately assess the group’s risk profile and generate firm rates without requiring employees to fill out a single form.
During underwriting, if the actuaries identify a specific employee with a known, severely expensive ongoing condition (for instance, an employee undergoing active cancer treatment), they may employ a tactic called “lasering.”
Instead of denying the group entirely, the carrier issues the stop-loss policy but carves out a separate, much higher specific deductible for that one individual. If the group’s standard specific stop-loss attachment point is $30,000, the “lasered” individual might have an attachment point of $150,000, meaning the employer’s claims fund is responsible for a much larger portion of that specific employee’s care. Employers evaluating level-funded quotes must rigorously review the contract for lasers, as they significantly alter the financial risk profile of the plan. Many premium level-funded products now offer “No New Laser” guarantees upon renewal, providing long-term security.
In a level-funded arrangement, the insurance carrier logo on the employee’s ID card is often just the network being leased. The entity actually running the plan is the Third-Party Administrator (TPA). The TPA processes the claims, manages the claims fund, provides customer service to the employees, and most importantly, provides data to the employer.
A major frustration for HR leaders utilizing fully insured plans is the blind renewal. The carrier delivers a 15% rate increase for the upcoming year, and when the employer asks for the data justifying the hike, the carrier refuses, citing privacy laws or proprietary algorithms. The employer is forced to make a multi-million-dollar purchasing decision completely blind.
Level-funded plans mandate total data transparency. Because it is the employer’s money in the claims fund, the TPA provides detailed, HIPAA-compliant monthly reporting. The employer can see exactly where their healthcare dollars are going: how much is being spent on pharmacy vs. inpatient care, the prevalence of emergency room utilization for non-emergencies, and the impact of chronic diseases on the workforce.
With this data, the employer can actively manage the plan. If the data shows high emergency room utilization, the HR team can implement targeted employee education campaigns redirecting staff to urgent care centers or telemedicine, directly reducing costs and increasing the likelihood of a year-end refund.
A level-funded plan is a long-term strategic play, and understanding the renewal mechanics is critical before making the jump.
If the group runs well and claims are low, the renewal is straightforward. The employer receives their surplus refund, and the rates for the following year remain stable or see single-digit inflationary adjustments.
However, if the group has a catastrophic year—several massive medical events that blow through the specific stop-loss, and overall utilization that hits the aggregate limit—the renewal dynamics change. The stop-loss carrier lost money, and they will adjust the rates upward for the following year to compensate for the newly discovered risk profile of the group.
The crucial advantage here is leverage. If the level-funded renewal comes back aggressively high due to a bad claims year, the employer is not trapped. They can simply take their group and move back into the fully insured market, where community rating rules force carriers to accept them without penalizing them for their poor claims history. The level-funded framework effectively provides a “heads I win, tails I tie” scenario for groups that manage the transition strategically.
Making the transition from fully insured to level-funded is a significant operational decision. It requires an evaluation of your organization’s demographic makeup, risk tolerance, and current financial trajectory.
A level-funded plan is highly advantageous if:
A level-funded plan is likely NOT the right fit if:
Connect with a licensed group benefits specialist to run a preliminary GRx underwriting sweep and determine if a level-funded model will reduce your organization's overhead.
Get a Free ConsultationLevel-funding strips away the opaque layers of traditional group health insurance. By separating fixed costs from variable claims and capping liability with stop-loss insurance, it provides Colorado employers with the financial control of a Fortune 500 company while maintaining the budgetary predictability required to run a growing business. When engineered correctly, it transforms a sunk operational cost into a manageable risk with the potential for substantial financial return.