Level-Funded Health Plans: A Smarter Option for Small Employers Facing Premium Shock

The renewal notices have been arriving all spring, and the numbers are not pretty. The median premium increase for small-group health insurance plans in 2026 is 11%, according to a Kaiser Family Foundation analysis of filings across all 50 states. About one in ten small-group insurers is proposing increases of 20% or more. For an employer of 50 or 100 employees, that kind of renewal is not a rounding error. It is a six-figure budget problem.

For many employers, the instinct is to either absorb the cost, shift more of it to employees, or reduce coverage. But a growing number of small and mid-sized employers are choosing a fourth option: moving off traditional fully insured coverage altogether and into a level-funded health plan.

Adoption of level-funded plans among small employers has gone from 7% in 2019 to 37% today, according to KFF data. That is not a niche experiment. It is a structural shift in how the small-employer market is funding health benefits: and if you have not looked closely at this option, 2026 may be the year you should.

What a Level-Funded Plan Actually Is

To understand level-funded plans, it helps to understand what they are not.

A traditional fully insured plan works the way most people think health insurance works: your company pays a premium to an insurance carrier, the carrier assumes all the financial risk, and claims are paid by the insurer. You pay the same amount every month regardless of how healthy or sick your workforce turns out to be. The predictability is real, but so is the premium loading: the insurer is charging you for the risk they are absorbing, plus their administrative costs and profit margin.

A fully self-funded plan sits at the other extreme. The employer funds claims directly, retains all the risk, and typically hires a third-party administrator to handle the mechanics. Large companies have operated this way for decades, but the financial volatility has historically made it impractical for smaller employers.

Level-funded plans bridge these two models. The employer pays a fixed monthly amount, the "level" payment, that covers expected claims, stop-loss insurance, and administration. The stop-loss insurance sets a ceiling on claims exposure, both per individual employee (specific stop-loss) and in aggregate across the entire workforce (aggregate stop-loss). If your workforce has a good year and claims come in below projections, you receive a refund of the surplus at the end of the year. If claims are worse than expected, the stop-loss coverage absorbs the excess.

In practice, you get much of the cost-control and transparency of self-funding, with the predictability protection of a fully insured plan.

Why the Cost Savings Are Real

The 22% average savings figure that is frequently cited for level-funded plans: based on UnitedHealthcare data comparing employers who migrated to level-funded against comparable fully insured premiums: sounds too clean. So it is worth understanding where those savings actually come from.

First. You are eliminating the risk margin built into fully insured premiums. Carriers charge small groups more because smaller pools mean more volatility, which they price accordingly. When your stop-loss coverage handles the catastrophic risk, you no longer need to pay for that entire margin.

Second, level-funded plans give you access to your own claims data. With a fully insured plan, the carrier owns the claims information. With a level-funded arrangement, you can see where your actual dollars are going: which conditions are driving costs, whether utilization is concentrated in a few high-cost members, whether your pharmacy spending is in line with benchmarks. That data is the foundation for real cost management over time.

Third, if your workforce is relatively healthy, you benefit directly. With a fully insured plan. You are pooled with other small employers and cannot separate your good experience from the group's. With a level-funded plan, your claims experience, and the potential refund, belongs to you.

Who This Model Works Best For

Level-funded plans are not the right fit for every employer, and responsible advisors will tell you that upfront.

The model works best for employers with 25 to 250 employees who have some history of stable, manageable claims. If you are a very young company with no claims track record, the underwriting on the stop-loss coverage may be less favorable. If you have had a few very high-cost claimants in recent years, those will show up in the underwriting and could reduce the savings significantly.

It also helps to have a workforce that is at least modestly engaged with preventive care. One of the advantages of seeing your own claims data is the ability to target wellness programs and disease management resources toward the specific conditions that are driving your costs. Employers who are willing to act on that data tend to see better long-term results.

That said, the threshold for level-funding viability has dropped considerably in recent years as stop-loss products have improved and more carriers have entered the market. Employers who were told three years ago that they were "too small" for level-funding should take another look with current products.

The Questions You Should Be Asking

If you are approaching a renewal with a significant increase, the conversation with your broker should include a level-funded analysis. Specifically, you should be asking:

What would our level-funded premium look like against our current fully insured quote, and what stop-loss attachment points are available? The attachment point, the claims threshold at which stop-loss coverage kicks in, is a key variable in the pricing.

What is our claims history for the past 24 to 36 months, and how does it affect the underwriting? You want an honest assessment of whether your experience is likely to work in your favor or against you.

Which third-party administrators are available in this arrangement, and what network access do they offer? The claims network your employees access matters just as much as the funding structure.

What happens at the end of the year if claims are better than projected? Understand exactly how the surplus refund mechanism works and under what conditions it applies.

What is the transition process if we decide to move back to fully insured coverage? It is worth knowing your options if the arrangement does not perform as expected.

What to Be Careful About

Level-funded plans are not risk-free. Stop-loss coverage reduces but does not eliminate claims volatility. If you have a year with an unusually high number of serious claims, even with stop-loss protection your renewal pricing for the following year may reflect that experience.

You are also taking on more administrative responsibility, or more precisely, your broker or third-party administrator is, but you need to be engaged with the data and the reporting in a way that fully insured employers typically are not. Employers who treat level-funding as a set-it-and-forget-it arrangement tend to leave money on the table.

Finally, not all level-funded plans are structured equally. The quality of the stop-loss carrier, the breadth of the network, and the transparency of the claims data reporting vary considerably. This is an area where the competence and integrity of your benefits advisor matters a great deal.

The Bigger Picture

The 11% median premium increase for 2026 is not an anomaly. It reflects structural cost pressures: rising utilization, GLP-1 drug spending, prescription drug inflation, that are unlikely to resolve quickly. Employers who continue to absorb annual fully insured increases without exploring alternative funding arrangements are essentially paying a premium for the simplicity of a model that is becoming progressively more expensive.

Level-funded plans will not be right for every employer in every year. But for a significant and growing segment of small and mid-sized employers, they represent the most practical way to meaningfully change the trajectory of health benefits costs without walking away from the commitment to coverage.

If you have not had this conversation with your advisor, the next renewal cycle is a reasonable time to start., -

Benefits Collective helps employers navigate health insurance decisions with clarity and strategy. If you are reviewing your upcoming renewal and want a second opinion on your options, schedule a consultation to explore what alternatives might be available to you.