Question 1

What is a self-funded health plan?

Accepted Answer

A self-funded (or self-insured) health plan is one where the employer pays employee health claims directly from company funds, rather than paying a fixed premium to an insurance carrier. The employer assumes the financial risk for claims, but also keeps the savings when claims are lower than expected. Most self-funded employers hire a Third Party Administrator (TPA) to process claims and purchase stop-loss insurance to cap their exposure on large individual claims.

Question 2

How many employees do you need to self-fund?

Accepted Answer

There is no legal minimum, but practical considerations matter. Groups as small as 25–50 employees can self-fund, especially with a low specific deductible ($50,000–$75,000) and strong aggregate stop-loss coverage. Most benefits consultants recommend self-funding for groups of 100+ employees, where claims data is more predictable and stop-loss premiums are more competitive. Groups under 50 employees face higher claims volatility and may find stop-loss premiums offset much of the savings.

Question 3

How much can employers save by self-funding?

Accepted Answer

Employers who switch from fully insured to self-funded typically save 10–25% on total plan costs in the first 1–3 years. The savings come from eliminating the insurance carrier's profit margin (typically 15–20% of premium), state premium taxes (2–3%), and risk charges. Additional savings come from better data access, which enables targeted cost-containment strategies. KFF data shows self-funded employers consistently spend less per employee than fully insured employers of comparable size.

Question 4

What is the biggest risk of self-funding?

Accepted Answer

The primary risk is claims volatility — a single catastrophic claim or a bad year with multiple high-cost claimants can significantly exceed budget. This risk is managed through stop-loss insurance: specific stop-loss caps your exposure on any single claimant (typically at $75,000–$250,000), and aggregate stop-loss caps your total annual exposure (typically at 115–125% of expected claims). With properly structured stop-loss, your maximum out-of-pocket is predictable and bounded.

Question 5

What is a TPA and do I need one?

Accepted Answer

A Third Party Administrator (TPA) processes your health claims, manages your provider network, handles member services, and provides reporting. Most self-funded employers need a TPA unless they are large enough to administer claims in-house (typically 5,000+ employees). Your TPA is your most important vendor — their claims accuracy, network access, and reporting quality directly affect your plan costs and member experience.

Question 6

Is self-funding subject to state insurance regulations?

Accepted Answer

Self-funded plans are governed by ERISA (federal law), not state insurance law. This means self-funded plans are generally exempt from state insurance mandates — required benefits that fully insured plans must cover. This ERISA preemption is one of the key advantages of self-funding for multi-state employers, as it allows a single uniform plan design across all states. However, some state laws do apply to self-funded plans (e.g., certain COBRA equivalents, mental health parity requirements).

Question 7

What is the difference between self-funded and level-funded?

Accepted Answer

Level-funded plans are a hybrid: the employer pays a fixed monthly amount (like a premium), but the plan is technically self-funded. If claims are lower than the fixed amount, the employer receives a refund at year-end. If claims exceed the fixed amount, stop-loss coverage kicks in. Level-funded plans offer the predictability of fully insured with some of the savings potential of self-funded. They are most common for groups of 10–100 employees.

Question 8

How does self-funding affect my employees?

Accepted Answer

From an employee perspective, a well-run self-funded plan looks identical to a fully insured plan — same ID cards, same network, same claims process. The difference is invisible to employees unless the employer changes plan design. Self-funded employers have more flexibility to customize benefits, add programs like direct primary care or centers of excellence, and design cost-sharing that fits their workforce.

Question 9

What data do I get access to with a self-funded plan?

Accepted Answer

Self-funded employers own their claims data and can access detailed reports on utilization, cost drivers, high-cost conditions, and pharmacy spend. This data is the foundation of every cost-containment strategy. Fully insured employers typically receive only summary-level data. With a self-funded plan and a good TPA, you can identify your top cost drivers, benchmark against industry data, and make targeted interventions.

Question 10

Can small employers self-fund?

Accepted Answer

Yes, but with important caveats. Groups under 50 employees face higher claims volatility and more expensive stop-loss premiums relative to expected savings. Level-funded plans are often a better fit for very small groups. For groups of 50–100 employees, self-funding can work well with a low specific deductible ($50,000–$75,000), strong aggregate coverage, and a TPA experienced with small groups. The key is right-sizing your stop-loss to match your risk tolerance.

Question 11

What is a run-out period and why does it matter?

Accepted Answer

A run-out period is the time after your plan year ends during which claims incurred during the plan year can still be submitted and paid. Most plans have a 90–180 day run-out. When switching from fully insured to self-funded, you need to account for run-out claims from your prior fully insured plan — these are claims your employees incurred before the switch but haven't submitted yet. Failing to budget for run-out claims is one of the most common first-year self-funding surprises.

Question 12

How do I know if self-funding is right for my company?

Accepted Answer

The key factors are group size (100+ employees is the sweet spot), financial capacity to absorb claims volatility, access to 2–3 years of claims history, and leadership commitment to active plan management. Self-funding rewards employers who engage with their data and implement cost-containment strategies. If you want to set it and forget it, fully insured may be a better fit. Take the Self-Funding Readiness Assessment to get a personalized recommendation.

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