Level-Funded vs. Fully Insured vs. Self-Insured Health Plans: Which Is Right for Your Company?

Health insurance is one of the first major operational decisions a growing company has to make. And the first question most founders get wrong isn't which carrier to pick or which plan tier to offer. It's how the plan is funded.

The three main health plan funding models are fully insured, self-insured (self-funded), and level-funded. They all deliver health coverage to your employees, but they handle financial risk, cost structure, and plan flexibility in fundamentally different ways. The right choice depends on your company's size, growth rate, cash position, and how much administrative complexity you're willing to take on.

Most guides on this topic are written for generic "small businesses." This one is written for founders and operators at fast-growing companies who are choosing benefits for the first time, scaling across states, and don't have an HR department to manage the details. (If you're also weighing whether a PEO makes sense for benefits, see our guide on whether startups actually need a PEO or EOR.)

The Simple Version: How Each Model Works

Before we get into the details, here's the core idea behind each model in plain terms.

Fully insured is like renting an apartment. You pay a fixed amount every month. If the roof leaks or the plumbing breaks, the landlord covers it. You never save money in a good month, but you never get a surprise bill either. It's predictable, simple, and someone else handles the risk.

Self-insured is like owning a house. You pay for repairs as they come up. Some months cost you almost nothing. Other months, the furnace dies and you're writing a big check. Over time, owners often spend less than renters because they're not paying someone else's profit margin. But you need the cash reserves to absorb a bad month, and you're responsible for maintaining everything yourself.

Level-funded is like owning a house with a home warranty. You pay a fixed monthly amount that covers a repair fund, a management fee, and an insurance policy for catastrophic problems. If you don't use the full repair fund by the end of the year, you get some of that money back. If something major breaks, the warranty kicks in. You get the upside of ownership with a safety net underneath.

The reason this decision matters is that each model puts financial risk in a different place. With fully insured, the insurance carrier holds all the risk and charges you a premium for it. With self-insured, you hold the risk and keep the savings. Level-funded splits the difference. The right choice depends on how much risk your company can absorb and how much you're willing to pay for someone else to absorb it instead.

Now let's break down how each one actually works.

What Is a Fully Insured Health Plan?

A fully insured plan is the traditional model: your company pays a fixed monthly premium to an insurance carrier, and the carrier assumes all the financial risk for your employees' medical claims. If claims are high, the carrier absorbs the cost. If claims are low, the carrier keeps the difference. Your premium stays the same either way.

This is the most straightforward option. You know exactly what you're paying each month, which makes budgeting simple. The carrier handles claims processing, compliance with state insurance regulations, and network management. For a company that wants predictability above all else, fully insured is the default.

The tradeoff is cost. Fully insured premiums include the carrier's administrative fees, profit margin, risk premium, and contributions to state insurance pools. According to the KFF 2025 Employer Health Benefits Survey, average annual premiums reached $9,325 for single coverage and $26,993 for family coverage, with family premiums rising 6% year over year. Those numbers reflect the fully loaded cost of traditional insurance, and for a young, healthy team, you may be overpaying relative to your actual claims.

Fully insured plans in the small group market (under 50 employees) are also governed by ACA community rating rules. That means your premiums are based on factors like employee age and location, not your group's actual health. A team of healthy 28-year-olds pays roughly the same rate as a group with significantly higher claims history. For healthy teams, this pooling can work against you.

Best for: Any size company that wants zero financial risk, minimal administrative burden, and are willing to pay more for simplicity.

What Is a Self-Insured (Self-Funded) Health Plan?

A self-insured plan means your company pays for employees' medical claims directly out of its own funds, rather than paying premiums to an insurance carrier. You're essentially acting as your own insurer. Most self-funded employers work with a third-party administrator (TPA) to handle claims processing and plan management, and purchase stop-loss insurance to cap exposure on catastrophic claims.

The upside is significant. You only pay for the healthcare your team actually uses. If claims come in low, you keep the savings. You also get full visibility into claims data, which lets you identify cost drivers and make smarter decisions about plan design, wellness programs, and provider networks. Self-funded plans are exempt from state insurance regulations (they're governed by federal ERISA rules instead), which means more flexibility in plan design and no state premium taxes.

The downside is risk. If your team has an unexpectedly expensive year, you're on the hook for claims up to your stop-loss threshold. Cash flow can be unpredictable month to month. And you'll need to manage relationships with a TPA, stop-loss carrier, and potentially a pharmacy benefit manager (PBM) separately.

The KFF 2025 survey found that 67% of all covered workers in the U.S. are enrolled in self-funded plans. But that number is heavily driven by large employers. At firms with 10 to 199 employees, only 27% of covered workers are in self-funded arrangements. Traditional self-funding works best when you have enough employees (typically 100 or more) that claims become statistically predictable.

Best for: Larger companies (100+ employees) with stable cash flow, an appetite for financial risk, and the internal resources to manage plan administration. Not typically the right first move for a startup.

What Is a Level-Funded Health Plan?

A level-funded plan is a hybrid that combines the predictable monthly payments of a fully insured plan with the cost-saving potential of self-funding. You pay a fixed amount each month, and that payment is split into three buckets: estimated claims costs, administrative fees, and stop-loss insurance. If your team's actual claims come in below the estimate at the end of the year, you may receive a refund of the unused funds. If claims exceed the estimate, the stop-loss insurance covers the overage.

Level-funded plans are technically a form of self-insurance. That means they're governed by ERISA rather than state small-group insurance rules, which gives employers more flexibility in plan design and pricing. Because your rates are based on your group's actual health profile (not a community-rated pool), a young, healthy team can often get lower rates than they would on a fully insured plan.

This model has exploded in popularity over the past several years. The KFF 2025 survey found that 37% of covered workers at small firms (10 to 199 employees) are now in level-funded plans, up from just 6% in 2018. The appeal is clear: you get budget-predictable monthly costs, the possibility of getting money back if your team stays healthy, and more insight into how your healthcare dollars are being spent.

The catch is that level-funded plans aren't available in every state due to varying stop-loss regulations. And if your group has higher-than-expected claims in a given year, your renewal rates will likely increase the following year, similar to how fully insured renewals work. The "refund potential" is real but not guaranteed.

Best for: Growing companies with 10 to 100 employees, a generally healthy workforce, and a desire for cost savings and transparency without taking on the full risk of self-funding.

How Do These Three Models Compare?

Here's a side-by-side breakdown of the key differences:

What About ICHRA?

There's a fourth option that most guides on this topic skip entirely: the Individual Coverage Health Reimbursement Arrangement, or ICHRA.

With an ICHRA, your company doesn't sponsor a group health plan at all. Instead, you set a monthly reimbursement allowance, and each employee uses that allowance to purchase their own individual health plan on the open market. The company reimburses employees tax-free up to the defined amount.

ICHRA is particularly useful for distributed teams. If you have employees in five different states, each person can choose the plan that works best in their local market, with their preferred doctors and network. You get precise cost control (you set the budget), employees get choice, and you avoid the complexity of administering a single group plan across multiple states. (For more on the compliance side of multi-state hiring, see our guide on state income tax withholding for remote employees.)

ICHRA became available in 2020 and adoption is still growing. The KFF 2025 survey found that about 4% of firms offering health benefits use an ICHRA, with slightly higher adoption among firms that don't offer a traditional group plan. For startups hiring across state lines, it can be a compelling alternative to traditional group coverage.

Best for: Distributed companies with employees across multiple states who want maximum cost control and employee flexibility. Also a strong option for very small teams (under 10) where group plan options are limited.

Which Funding Model Is Best for a Growing Company?

There's no universal answer, but the decision tends to follow a pattern as companies scale.

At the earliest stage (under 10 employees), a fully insured small group plan or ICHRA is usually the simplest path. You're focused on product and fundraising, not insurance administration. Pick a carrier, enroll your team, and move on. The more important decision at this stage is often choosing the right payroll platform that can grow with you as your benefits needs become more complex.

Once you hit 10 to 50 employees and have a generally healthy, younger workforce, level-funded plans become worth evaluating seriously. The potential savings are real. If your team's claims run below projections, you could see costs come in meaningfully lower than a comparable fully insured plan. You'll also gain access to claims data that helps you make better decisions at renewal time.

At 50+ employees, you may begin exploring traditional self-funding, especially if your cash position is strong and you want full control over plan design. Many companies use level-funded as a stepping stone: they spend a year or two building claims history and comfort with the model before transitioning to full self-insurance.

If your team is distributed across many states, ICHRA might be the most operationally efficient option regardless of size. Rather than trying to find a single group plan with networks that work everywhere, you let each employee choose local coverage. Just keep in mind that each new state comes with its own payroll tax registration requirements beyond just benefits.

The key factors to weigh: your team's age and health profile, your headcount and growth trajectory, your risk tolerance, how many states you operate in, and how much time you can spend on benefits administration.

Why the Funding Decision Is Also an Infrastructure Decision

Here's what most guides miss: choosing a health plan funding model isn't just an insurance decision. It's an operational one.

Whichever model you choose, the plan needs to integrate with your payroll system. Employee and employer premium contributions need to be calculated and deducted every pay run. Carrier enrollments need to stay in sync through EDI feeds. Qualifying life events (a new baby, a marriage, a move to a new state) need to trigger enrollment windows automatically. Premium invoices from carriers need to be reconciled against what was actually deducted from payroll. If you're still setting up payroll infrastructure, our complete payroll setup guide walks through the full process.

If these systems don't talk to each other, you end up with manual data entry, mismatched deductions, and compliance gaps. That's true whether you're fully insured, level-funded, or self-insured. And it compounds when you layer in other payroll compliance obligations like quarterly tax filings and annual deadlines.

This is why Warp builds benefits administration directly into payroll. Warp is a licensed insurance brokerage with direct carrier relationships across 30+ carriers, including United Healthcare, Blue Cross Blue Shield, Kaiser, Aetna, Cigna, and Oscar. Whether you choose a small group plan, a level-funded option, or an ICHRA, enrollment, deductions, carrier sync, and premium reconciliation all happen automatically inside the same platform where you run payroll.

Every Warp customer also gets a dedicated Benefits Advisor who helps evaluate which funding model makes sense for your team, shops carrier options across the full market, and guides you through enrollment and renewal. No separate broker. No third-party portal. No manual reconciliation.

When your team grows and you need to re-evaluate your funding model (say, moving from fully insured to level-funded as you scale past 20 employees), the transition happens inside the same system. No data migration, no carrier gaps, no lapsed coverage. If you're coming off a PEO arrangement, we also have a step-by-step guide on moving off a PEO that covers the benefits transition in detail.

Health insurance is just one piece of a competitive benefits package. If you're also thinking about retirement benefits, see our guide on how to set up a 401(k) for your startup.

Frequently Asked Questions

Can a startup use a level-funded health plan?

Yes. Level-funded plans are available to employers with as few as two employees in most states, though they tend to be most cost-effective for groups of 10 or more. Startups with a young, healthy team stand to benefit the most because level-funded rates are based on your group's actual health profile rather than a community-rated pool.

What happens if claims exceed the estimate on a level-funded plan?

If your team's claims come in higher than projected, the stop-loss insurance built into your level-funded plan covers the excess. You won't owe more than your fixed monthly payment during the plan year. However, high claims may result in higher rates at renewal.

Is a self-insured plan too risky for a small company?

Traditional self-insurance can be risky for small companies because a single expensive claim can have an outsized impact. That's why level-funded plans exist: they offer many of the benefits of self-funding (cost transparency, potential refunds, ERISA flexibility) while capping your downside with stop-loss insurance.

How does ICHRA differ from a traditional group health plan?

With a group plan, the employer selects and sponsors specific insurance plans for the whole team. With ICHRA, the employer sets a reimbursement budget and each employee chooses their own individual plan. ICHRA gives employees more choice and works well for distributed teams, but it requires employees to shop for their own coverage.

Do employees notice a difference between funding models?

From the employee's perspective, the day-to-day experience is largely the same regardless of funding model. They get an insurance card from a recognized carrier, access the carrier's provider network, and submit claims the same way. The funding model is primarily an employer-side decision about how costs and risk are structured.

Warp is the only AI-native HR and payroll platform built for ambitious, fast-growing companies. Warp's in-house benefits brokerage helps you evaluate fully insured, level-funded, ICHRA, and other plan options, then administers everything automatically inside your payroll system. Learn more about Warp Benefits →