Question 1

What exactly is a self-funded health plan?

Accepted Answer

In a self-funded plan, your company pays employee medical claims directly instead of paying a fixed premium to an insurance carrier. You assume the financial risk for claims — but you also keep the savings when claims run below budget. Most self-funded employers hire a Third Party Administrator (TPA) to process claims and purchase stop-loss insurance to cap exposure on large individual claims. About 65% of covered workers in the U.S. are in self-funded plans.

Question 2

How is self-funding different from fully insured?

Accepted Answer

With fully insured, you pay a fixed monthly premium and the carrier bears all claims risk. With self-funded, you pay actual claims as they occur and keep the difference if claims are low. Self-funded plans are governed by ERISA (federal law), not state insurance law, which means you avoid state premium taxes (2–3%), state benefit mandates, and the carrier's profit margin (typically 15–20% of premium). The tradeoff is that you bear claims risk — managed through stop-loss insurance.

Question 3

What is level-funded and how is it different from self-funded?

Accepted Answer

Level-funded is a hybrid: you pay a fixed monthly amount (like a premium), but the plan is technically self-funded. If claims are lower than the fixed amount, you receive a refund at year-end. If claims exceed it, stop-loss coverage kicks in. Level-funded plans offer premium predictability with some self-funding upside. They are most common for groups of 10–100 employees who want to test self-funding without full claims volatility exposure.

Question 4

How many employees do I need to self-fund?

Accepted Answer

There is no legal minimum. Groups as small as 25–50 employees can self-fund with a low specific deductible and strong aggregate stop-loss. Most benefits consultants recommend self-funding for groups of 100+ employees, where claims data is more predictable and stop-loss premiums are more competitive. Under 50 employees, claims volatility is high and stop-loss premiums may offset much of the savings — level-funded is often a better fit.

Question 5

How much can we realistically save by self-funding?

Accepted Answer

Employers switching from fully insured to self-funded typically save 10–25% on total plan costs in the first 1–3 years. Savings come from eliminating the carrier's profit margin (15–20%), state premium taxes (2–3%), and risk charges. Additional savings come from data access — self-funded employers can see exactly where claims dollars are going and implement targeted cost-containment strategies. KFF data consistently shows self-funded employers spend less per employee than fully insured employers of comparable size.

Question 6

What does a self-funded plan actually cost to run?

Accepted Answer

Your total cost has four components: (1) actual medical and pharmacy claims paid, (2) TPA administrative fees (typically $25–$75 per employee per month), (3) stop-loss insurance premiums (varies widely by group size, deductible, and claims history), and (4) network access fees. The key advantage is that components 1 and 3 are directly tied to your actual claims experience — a healthy group with good cost-containment strategies pays significantly less than a comparable fully insured group.

Question 7

What happens if we have a catastrophic claims year?

Accepted Answer

Stop-loss insurance is specifically designed for this scenario. Specific stop-loss (also called individual stop-loss) caps your exposure on any single claimant — typically at $75,000–$250,000 per person per year. Aggregate stop-loss caps your total annual claims exposure — typically at 115–125% of expected claims. With properly structured stop-loss, your maximum out-of-pocket is predictable and bounded, even in a catastrophic year.

Question 8

Are there upfront costs to switching to self-funding?

Accepted Answer

Yes — plan for implementation costs including TPA setup fees, stop-loss premium for the first year, and run-out liability from your prior fully insured plan. Run-out is the most commonly overlooked cost: claims your employees incurred before the switch but haven't submitted yet will still need to be paid. Budget 1–3 months of prior plan claims as a run-out reserve. Most employers fund this from the premium savings in the first year.

Question 9

What does a TPA do and do I need one?

Accepted Answer

A Third Party Administrator (TPA) processes your health claims, manages your provider network, handles member services, produces utilization reports, and supports compliance. 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 data quality directly affect your plan costs and member experience.

Question 10

How do I choose the right TPA?

Accepted Answer

Evaluate TPAs on five dimensions: (1) network access and quality in your geography, (2) claims accuracy and turnaround time, (3) data reporting and transparency, (4) PBM model and pharmacy cost-containment capabilities, and (5) contract terms — specifically data ownership, termination rights, and audit rights. Carrier-owned TPAs (Aetna, Cigna, UHC) offer broad networks but less flexibility. Independent TPAs offer more customization and better data access.

Question 11

What is a PBM and why does it matter for self-funded plans?

Accepted Answer

A Pharmacy Benefit Manager (PBM) negotiates drug prices, processes pharmacy claims, and manages your formulary. For self-funded employers, PBM selection is one of the highest-leverage cost decisions — pharmacy spend is typically 20–30% of total plan costs and growing. The key issues are rebate transparency (are rebates passed through to you or kept by the PBM?), spread pricing (is the PBM marking up drug costs?), and formulary design. Employer-friendly PBMs pass through 100% of rebates and use transparent pricing.

Question 12

Can I use my current carrier's network with a different TPA?

Accepted Answer

Yes — this is called open architecture or network rental. Many independent TPAs have access to major carrier networks (Blue Cross, Aetna, Cigna, UHC) through network rental agreements. This lets you keep the network your employees know while gaining the flexibility and data access of an independent TPA. Network rental fees vary; confirm access in your geography before switching.

Question 13

What is specific stop-loss and how does it work?

Accepted Answer

Specific stop-loss (individual stop-loss) reimburses the employer when a single claimant's claims exceed a set threshold — the specific deductible — in a plan year. For example, with a $100,000 specific deductible, the employer pays the first $100,000 of claims for any individual; the stop-loss carrier pays everything above that. Specific deductibles typically range from $50,000 to $500,000 depending on group size and risk tolerance.

Question 14

What is aggregate stop-loss?

Accepted Answer

Aggregate stop-loss caps your total annual claims liability across all claimants. It is typically set at 115–125% of expected claims. If total plan claims exceed the aggregate attachment point, the stop-loss carrier reimburses the excess. Aggregate stop-loss protects against a bad year where many employees have moderate-to-high claims simultaneously — a scenario specific stop-loss alone does not cover.

Question 15

What is a laser and should I be worried about it?

Accepted Answer

A laser is a stop-loss carrier provision that excludes a specific known high-cost claimant from stop-loss coverage, or sets a higher specific deductible for that individual. Lasers are applied at renewal when a carrier identifies a claimant likely to generate large claims again. They are a significant risk at renewal — a lasered claimant can expose the employer to unlimited liability for that individual. Review your stop-loss contract carefully for laser provisions and negotiate laser caps.

Question 16

How do I right-size my stop-loss deductible?

Accepted Answer

The right specific deductible depends on your group size, financial reserves, and risk tolerance. A lower deductible (e.g., $50,000) means higher premiums but more protection. A higher deductible (e.g., $200,000) means lower premiums but more self-retained risk. General guidance: groups under 200 employees should consider $75,000–$100,000 specific deductibles. Groups of 500+ employees can often self-retain more risk with $150,000–$250,000 deductibles. Model multiple scenarios with your stop-loss broker.

Question 17

Is a self-funded plan subject to state insurance laws?

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. ERISA preemption is one of the key advantages for multi-state employers, enabling a single uniform plan design across all states. Some state laws still apply to self-funded plans (certain COBRA equivalents, mental health parity, surprise billing rules).

Question 18

What are my fiduciary duties as a self-funded plan sponsor?

Accepted Answer

As a self-funded plan sponsor, you are an ERISA fiduciary. Your duties include: acting solely in the interest of plan participants, selecting and monitoring service providers prudently, ensuring plan fees are reasonable, and following the plan document. The most common fiduciary failures are failing to monitor TPA and PBM fees, not reviewing vendor contracts, and not benchmarking plan costs. Document your vendor selection and monitoring processes.

Question 19

What is the CAA and what does it require of self-funded employers?

Accepted Answer

The Consolidated Appropriations Act (CAA) of 2021 imposed significant new requirements on self-funded plan sponsors, including: (1) broker and consultant compensation disclosure, (2) gag clause prohibition — you have the right to access your claims data, (3) mental health parity comparative analysis, (4) surprise billing protections, and (5) prescription drug reporting (RxDC). CAA compliance is ongoing — new requirements have been added in subsequent years.

Question 20

Do I need to file anything with the IRS as a self-funded employer?

Accepted Answer

If you are an Applicable Large Employer (ALE — 50+ full-time equivalent employees), you must file Forms 1094-C and 1095-C annually with the IRS and furnish Form 1095-C to each full-time employee. Self-funded employers also report on Form 1095-C Part III to document the coverage offered. Additionally, self-funded plans must pay the PCORI fee annually (due July 31) and file Form 720.

Self-Funding Questions

Getting started

Costs and savings

TPAs and vendors

Risk and stop-loss

Compliance and ERISA

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