What is level funding and why do companies use it?

What is level funding?

Level funding is essentially a hybrid between a fully self-funded plan, where an employer assumes the risk and responsibility of health claims, and a fully-funded plan, where employers contract directly with insurance carriers. Level funding is designed to help small to medium-size companies reap the benefits of self-funding while mitigating some of the risks and reducing the disadvantages associated with a fully self-funded plan.

How does level funding work?

With level funding, companies have fixed or level monthly costs which typically include the cost of administration, stop-loss coverage, administrative fees, and the maximum claims based on underwriting projections.

Throughout the year, the insurance carrier will continually pay for employees’ claims. At the end of the year, payments are calculated and if the employer’s payments exceed the submitted claims, employers are refunded. This refund is pulled directly from the monthly claim allotments from the employer’s fixed monthly costs. Similar to a fully self-funded plan, stop-loss insurance will cover the overage amount should claims exceed what was initially paid into the program.

Claims make up the variable portion of level-funded plans and can be dependent on the health and well-being of the workforce. In this case, it’s advantageous for employers understand their employee demographics and introduce a robust wellness solution in conjunction with a flexible plan to succeed with a level funding benefits strategy.

Why use level funding?

There are many benefits of level-funded plans, to both employees and employers, including:
  • 1.  The Opportunity to Save

    If the money set aside every month to cover claims is not used by the end of the year, employers are refunded from the surplus. This is a key difference from fully-insured plans where employers pay premiums and have no opportunity for repayment if claims are reduced throughout the year.

  • 2.  Change in Tax Requirements

    Level-funded plans are not subject to state premium taxes and avoid state health coverage mandates. With the change in regulation, this usually also means a decrease in the administrative work required, providing a direct benefit for smaller companies with a smaller staff.

  • 3.  Flexibility of Plan Design

    Employers can customize their plan design to best suit the needs of their workforce, including choosing from both traditional and account-based health-care plans.

Things to consider

Not all plans are created equal. Depending on the size of a company, the terms of the contract can vary. It’s important to understand how individual plans will be impacted depending on the size of the business. With any self-funded plan, small to medium-sized businesses often benefit the most. In fact, “many level funding plans restrict their offerings to companies with a certain minimum or maximum number of employees, which may affect your ability to contract with your desired carrier.”

Is level funding right for your business?

As with most business solutions, it depends. There are four key components that should be considered when evaluating health-care plans: cash flow, risk tolerance, employee numbers and preferred budget methods. 

With rising health insurance costs, successful employee wellness programs are also critical when considering health-care plan design. While wellness solutions sometimes add an additional cost, this is easily offset by the decreases in overall medical costs from employee claims as well as an increase in employee retention, productivity, and increased job satisfaction. Keep in mind, one of the biggest benefits of any self-funded plan is the opportunity to be refunded at the end of the year. If employees are healthier and produce fewer claims, there is a greater opportunity to be refunded and experience cost savings. 

Check out the 12 requirements for successful employee wellness programs below to learn how to build an engaging and impactful corporate wellness program. 

12 Requirements for Successful Employee Wellness Programs

Read 12 critical requirements for building out an engaging and impactful corporate wellness program and why mobile apps are essential component for success.

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