Self-Funded Health 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.