Self-Funded Health Plan
Also known as: Self-Insured Health Plan, Self-Funded Plan
A self-funded (or self-insured) health plan is an arrangement in which the employer assumes the financial risk of providing health benefits and pays employees' medical and pharmacy claims directly from its own assets, rather than paying fixed premiums to an insurance company for a fully-insured plan. The employer sets up a claims fund, and a third-party administrator or carrier processes claims against it. Because the employer keeps the dollars that a fully-insured carrier would otherwise pocket as profit and risk margin, self-funding can lower costs and give the employer far more control over plan design and access to claims data.
The critical backstop is stop-loss insurance, which protects the employer from the volatility of paying claims itself. Specific stop-loss caps the employer's cost for any single member above a chosen attachment point, while aggregate stop-loss caps total plan claims for the year. Without stop-loss, a single premature birth or cancer case could devastate a small company's cash flow, so the coverage is what makes self-funding viable for employers below the very largest tier. Most self-funded employers also use an administrative services only agreement so a carrier handles the paperwork without bearing the underwriting risk.
The practical nuance for a small-business buyer is cash-flow variability and regulatory treatment. Because self-funded plans are governed primarily by federal ERISA law rather than state insurance mandates, they can skip some state-required benefits and premium taxes — but the employer must still meet minimum essential coverage and other Affordable Care Act obligations. Owners should budget for months where claims spike, understand how stop-loss reimbursements are timed (reimbursement vs. advance-funding), and watch for a 'laser' — a higher attachment point the stop-loss carrier assigns to a known high-cost member at renewal. For firms comfortable with some month-to-month swing, self-funding often beats a fully-insured renewal over time.
Real-world scenario
Ironwood Manufacturing, a 140-employee metal-fabrication shop in Ohio, was quoted a fully-insured renewal of $1,820,000 per year — a 14% jump. Their broker instead built a self-funded health plan. Ironwood set an expected annual claims budget of $1,240,000, funded a claims account of roughly $103,000 per month, and paid a third-party administrator $38 per employee per month (about $63,840 a year) under an administrative services only arrangement to process claims and run the network.
Because one catastrophic case could wipe out the fund, Ironwood bought stop-loss insurance. The specific (individual) policy set an attachment point of $75,000 per member, costing $188,000 annually, and the aggregate policy capped total plan liability at 125% of expected, or about $1,550,000. Mid-year, an employee needed a spinal fusion and complications drove that person's claims to $412,000. Ironwood paid the first $75,000; the specific stop-loss reimbursed the remaining $337,000.
At year-end, total retained claims landed at $1,090,000 — under budget. Adding stop-loss premium and admin fees, Ironwood's all-in cost was roughly $1,342,000, saving about $478,000 versus the fully-insured quote. They also paid a small ERISA bond premium of $450 to protect plan assets and reserved $96,000 for claims incurred but not yet reported.
How it affects your premium
A self-funded plan has no single "premium." Instead, employers budget expected claims plus fixed costs, and the biggest lever is the stop-loss premium that protects against catastrophic risk. Key cost drivers include:
- Group demographics and claims history — average age, family composition, and prior large claims directly set the expected-claims budget and stop-loss rates.
- Specific attachment point — a lower attachment point transfers more risk to the stop-loss carrier and raises premium; a higher one lowers premium but increases employer exposure.
- Aggregate corridor — the percentage (commonly 120-125%) above expected claims where aggregate stop-loss kicks in affects total worst-case cost.
- Network and pricing model — PPO discounts versus a reference-based pricing approach change both claims spend and admin complexity.
- Administrative fees — the per-employee-per-month TPA charge, plus care-management and pharmacy-benefit fees.
- Known ongoing (lasered) conditions — carriers may exclude or raise the attachment point for members with active high-cost claims.
- Group size and stability — larger, lower-turnover groups get more credible pricing and smaller stop-loss margins.
Common misconceptions
Myth: Self-funding is only for huge corporations with thousands of employees.
Reality:
Groups as small as 25-50 employees now self-fund routinely, often through a level-funded arrangement that smooths monthly costs while retaining stop-loss protection.
Myth: If a self-funded plan has one bad claim year, the employer could lose everything.
Reality:
That is exactly what stop-loss insurance prevents — specific stop-loss caps any single member's cost and aggregate stop-loss caps the plan's total annual liability.
Myth: Self-funded plans do not have to follow ACA rules.
Reality:
Self-funded plans are still subject to the ACA employer mandate and must provide minimum essential coverage; they are simply exempt from some state insurance mandates via ERISA preemption.
Frequently asked questions
What is the difference between self-funded and fully-insured health plans?
In a fully-insured plan the employer pays fixed premiums and the carrier bears all claims risk. In a self-funded plan the employer pays claims directly (protected by stop-loss) and keeps any savings when claims run below budget.
Do I need stop-loss insurance if I self-fund?
Practically, yes. Without it, a single catastrophic claim could exceed your entire annual budget, so nearly all self-funded employers buy both specific and aggregate stop-loss to cap their exposure.
Who processes the claims on a self-funded plan?
A third-party administrator handles claims, networks, and member service under an administrative services only contract, since the employer — not an insurer — is the actual payer.
Is a level-funded plan the same as self-funding?
A level-funded plan is a form of self-funding designed for smaller groups; it bundles expected claims, admin, and stop-loss into a steady monthly payment with a potential refund of unused claim funds.
Do self-funded plans still have to cover COBRA?
Yes. Self-funded employer plans subject to federal rules must offer COBRA continuation coverage to qualifying employees and dependents after a qualifying event.
Sources cited
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