What is the difference between self-funded and fully insured health plans?

In a fully insured plan, the employer pays a fixed monthly premium to an insurance carrier, which assumes all financial risk for claims. In a self-funded plan, the employer pays claims directly as they occur and retains the financial risk (up to stop-loss limits). Self-funded plans typically cost 10–20% less than fully insured plans for employers with 100+ employees because they eliminate the carrier's profit margin and state premium taxes.

What size employer should consider self-funding?

Self-funding is generally appropriate for employers with 100 or more employees, though some employers with 50–100 employees self-fund successfully with strong stop-loss protection. The key factors are: sufficient employee count to spread risk, financial reserves to absorb claims volatility, and access to a quality TPA and stop-loss carrier. Level-funded plans offer a hybrid option for smaller employers (25–100 employees) that want some self-funding benefits with more predictable costs.

What is stop-loss insurance and why do self-funded employers need it?

Stop-loss insurance protects self-funded employers from catastrophic claims. Specific stop-loss covers individual claims above a set threshold (typically $50,000–$250,000 per person). Aggregate stop-loss caps total plan liability at a percentage of expected claims (typically 120–125%). Without stop-loss, a single catastrophic claim — cancer treatment, premature birth, organ transplant — could cost the employer $1–5 million.

What are the main advantages of self-funding for employers?

Key advantages include: 10–20% cost savings by eliminating carrier profit margins and state premium taxes; full access to claims data for cost management; plan design flexibility to customize benefits; ERISA preemption from state insurance mandates; cash flow benefits from paying claims as incurred rather than prepaying premiums; and the ability to keep surplus in good claims years.

What are the risks of self-funding?

The primary risks are claims volatility (costs vary month-to-month based on actual utilization), catastrophic claim exposure (mitigated by stop-loss), administrative complexity (requires TPA, stop-loss carrier, and active management), and fiduciary responsibility under ERISA. These risks are manageable for most employers with 100+ employees through proper stop-loss coverage and a quality TPA.

Foundation

Self-Funded vs. Fully Insured Health Plans

The choice between self-funding and fully insured coverage is the most consequential benefits decision most employers make. Here's a complete, honest comparison — including when fully insured is actually the right answer.

Side-by-side comparison

Dimension	Self-Funded	Fully Insured
Who pays claims	Employer pays claims directly	Insurance carrier pays claims
Monthly cost	Variable — based on actual claims	Fixed premium regardless of claims
Claims data	Full ownership — every claim visible	Limited or no access to claims data
Plan design flexibility	High — customize benefits freely	Low — constrained by carrier offerings
State mandates	Exempt (ERISA preemption)	Subject to all state mandates
Stop-loss required	Yes — specific and aggregate	No — carrier bears all risk
Savings in good years	Employer keeps the surplus	Carrier keeps the surplus
Risk in bad years	Employer absorbs (up to stop-loss)	Carrier absorbs all risk
Minimum group size	50–100+ employees recommended	Any size
Administrative complexity	Moderate — TPA manages day-to-day	Low — carrier handles everything

When self-funding wins

You have 100+ employees with relatively stable, predictable claims history

You want full visibility into what's driving your healthcare costs

You want to customize plan design — different deductibles, networks, or carve-outs

You operate in multiple states and want consistent plan design across all of them

You're willing to invest in a strong TPA and stop-loss structure

You have a long-term cost-containment strategy (DPC, COEs, RBP, PBM reform)

When fully insured may be better

You have fewer than 50 employees — claims volatility is too high

Your workforce has known high-cost claimants that would make stop-loss expensive

You don't have the bandwidth to manage a TPA relationship and claims data

You're in a state with favorable fully insured markets and strong mandates you want

The level-funded middle ground

Level-funded plans are a hybrid: you pay a fixed monthly amount (like fully insured), but the plan is actually self-funded underneath. If claims come in below projections, you get a refund. You also get more claims data than a traditional fully insured plan. Level-funded is often the right starting point for groups of 25–100 employees who aren't ready for full self-funding.

Related tools

Self-Funding Readiness Assessment

See whether your group is ready to move from fully insured to self-funded.

Level-Funding: The Middle Ground

Explore the hybrid option for groups of 25–100 employees.

Benefits IQ Score™

Benchmark your Funding Strategy domain against peer employers.

Take the readiness assessment ← Back to hub