What is the difference between fully insured vs self insured health plans? It comes down to who carries the claims risk. In a fully insured plan you pay a fixed premium and the carrier pays every claim. In a self insured plan you fund claims directly, buy stop-loss coverage to cap your exposure, and keep whatever you do not spend.
That single distinction drives everything else: what you pay, what you can see, what you can change, and which regulators you answer to. With January 1 renewals landing in the middle of the steepest cost run-up in fifteen years, it is also the most consequential benefits decision most mid-sized employers will make this fall. Here is the full comparison, the numbers behind it, and a way to decide before your renewal deadline.
Why the funding decision matters more for 2027
Employers are not choosing between a cheap option and an expensive one. They are choosing how to absorb an increase that is already baked in.
Mercer’s survey of more than 1,700 employers put the expected 2026 increase in total health benefit cost per employee at 6.5 percent, the highest since 2010, and that figure already assumes employers make plan design changes. Without those changes the average would have landed near 9 percent. Aon projected 9.5 percent and costs above $17,000 per employee. PwC put underlying medical trend at 8.5 percent.
The base those increases apply to is not small. KFF’s 2025 Employer Health Benefits Survey put average annual premiums at $9,325 for single coverage and $26,993 for family coverage, up 5 percent and 6 percent in a single year, against 4 percent wage growth and 2.7 percent inflation. For a 60-employee company with a typical mix of single and family enrollment, a 7 percent renewal is roughly $80,000 to $100,000 in new spend. That is the number that sends employers to look at self funding.
How does a fully insured health plan work?
In a fully insured plan you pay a fixed monthly premium per enrolled employee and the insurance carrier assumes all financial responsibility for claims. If your workforce has a catastrophic year, the carrier absorbs it. If your workforce barely uses the plan, the carrier keeps the difference.
What you get: a premium you can budget twelve months out, no claims administration and no funding volatility, the carrier’s network and plan designs with stop-loss built into the rate, and coverage subject to state insurance mandates that vary widely by state.
What you give up: detailed claims data, since most carriers release only limited reporting to fully insured groups, particularly under 100 lives, which makes it hard to see what is actually driving your cost. You also give up plan design flexibility, choosing from the carrier’s shelf, and any surplus in a good claims year.
Fully insured carriers do operate under the ACA’s medical loss ratio rules, which require them to spend at least 80 percent of small-group premium dollars on claims and quality improvement or issue rebates. That is a floor on carrier margin, not a guarantee that your specific group got a fair rate.
How does a self insured health plan work?
In a self insured, or self funded, health plan the employer pays employee medical claims out of company funds as they come in, hires a third-party administrator to process them, and buys stop-loss insurance so a small number of large claims cannot break the budget. The monthly outlay usually has four parts.
| Component | What it covers | Typical share of spend |
| Claims funding | Actual member medical and pharmacy claims | 70% to 80% |
| TPA or ASO fee | Claims processing, network access, member service | 5% to 10% |
| Stop-loss premium | Specific and aggregate protection | 10% to 20% |
| Plan fees | PCORI, ACA reporting, Form 5500 prep, broker or consultant | 1% to 3% |
Two kinds of stop-loss do the protective work. Specific stop-loss caps what you pay on any one member, commonly at a deductible between $25,000 and $150,000 depending on group size. Aggregate stop-loss caps total plan claims, usually at 120 to 125 percent of expected claims for the year. Together they convert an unlimited liability into a defined worst case you can put in a budget.
Self funding is far more common than most small employers assume. KFF found 67 percent of covered workers were in a self-funded arrangement in 2025, including 80 percent at large firms and 27 percent at small firms.
Fully insured vs self insured: side by side
| Factor | Fully insured | Self insured |
| Who pays claims | Insurance carrier | Employer, up to stop-loss |
| Monthly cost | Fixed premium | Variable claims plus fixed fees |
| Good claims year | Carrier keeps surplus | Employer keeps surplus |
| Bad claims year | Carrier absorbs it | Stop-loss absorbs above the deductible |
| Claims data access | Limited, often summary only | Full, usually monthly |
| Plan design | Carrier’s filed products | Employer designs, within federal rules |
| State insurance mandates | Apply | Preempted by ERISA |
| State premium tax | Built into premium, roughly 1% to 3% | Not owed on self-funded claims |
| PCORI fee | Carrier pays, built into premium | Employer files Form 720 and pays |
| Form 5500 | Often carrier-supported | Employer responsibility |
| Best fit | Under 25 employees, thin reserves, low risk tolerance | 50+ employees, stable cash flow, appetite for data |
What is a level funded health plan, and is it the middle ground?
A level funded plan is a self-insured plan wrapped in a fixed monthly payment. You pay one predictable amount each month covering expected claims, administration, and stop-loss. If actual claims come in below expectations, the carrier typically refunds a share of the surplus after the plan year closes. If claims run high, stop-loss covers the overage and your monthly payment does not change mid-year.
For compliance purposes, level funded plans are generally treated as self insured. You get ERISA preemption and claims data, and you take on the associated filings. This is now the default entry point for smaller employers testing self funding. KFF found 37 percent of covered workers at firms with 10 to 199 employees were in a level funded plan in 2025. For a company with 30 to 80 employees that wants claims transparency without genuine month-to-month volatility, level funding is usually the right first step rather than jumping straight to full self funding.
Does self funding actually save money?
Sometimes, and the savings are not where most employers expect. The real sources are the absence of state premium tax on self-funded claims, which is roughly 1 to 3 percent off the top of every premium dollar depending on the state. There is no carrier risk margin or profit load on the claims portion, because you are buying administration and catastrophic protection instead of risk transfer on the entire population. Surplus stays with you in a good year. Exemption from state benefit mandates lets you design around coverage requirements that do not fit your workforce.
The durable one is claims data you can act on. When you can see that musculoskeletal claims or a single specialty drug is driving 30 percent of spend, you can do something about it. Fully insured groups usually cannot see that at all.
The offsetting costs are real. You take on cash flow variability within the stop-loss corridor, PCORI at $3.84 per covered life for plan years ending between October 1, 2025 and September 30, 2026, Form 5500 filing, Section 105(h) nondiscrimination testing, and the administrative work of running a plan you now sponsor directly. A group with predictable, moderate utilization and stable headcount typically comes out ahead. A group with one or two chronic high-cost claimants and thin reserves usually does not, and should stay fully insured or move to level funding first.
Is self funded insurance good for employees?
From the member’s seat, a well-run self-funded plan is usually indistinguishable from a fully insured one. Same ID card, same network, same claims process, because the TPA is often an arm of a major carrier.
Where employees gain: plan design built around the workforce you actually have, faster changes without waiting for a carrier to file a new product, and access to direct contracting, centers of excellence, and targeted programs that fully insured plans rarely offer to smaller groups.
Where they can lose: if an employer self funds without adequate reserves or appropriate stop-loss, cost pressure can push toward benefit cuts mid-cycle. That is an execution failure, not a feature of self funding, and it is preventable with proper stop-loss placement.
What compliance obligations change when you self fund?
This is the part employers underestimate. When you self fund, you become the plan sponsor in a much more direct sense.
- Form 5500. Required for plans with 100 or more participants. The DOL penalty for a late filing runs up to $2,739 per day, per plan. The Delinquent Filer Voluntary Compliance Program reduces that substantially if you correct it before EBSA contacts you.
- PCORI fee. Self-funded sponsors report and pay on the second-quarter Form 720 by July 31 following the plan year end, at $3.84 per covered life for plan years ending on or after October 1, 2025 and before October 1, 2026. Fully insured employers do not file this. Their carrier does.
- Section 105(h) nondiscrimination testing. Self-insured plans cannot discriminate in favor of highly compensated individuals on eligibility or benefits. Fully insured plans are not currently subject to this test.
- ACA reporting. Applicable large employers file Forms 1094-C and 1095-C either way, but a self-funded sponsor also reports covered individuals in Part III. The 2026 penalty for a late or incorrect return reaches $340 per form and $680 per form for intentional disregard, with no cap.
- SPD, SBC, and plan documents. You author and distribute them. Failure to furnish an SPD on request carries a statutory $110 per day penalty.
- COBRA administration. You or your TPA runs it. A missed election notice runs $110 per day, per qualified beneficiary.
None of this is prohibitive. It is a calendar, and it needs an owner.
Who should stay fully insured?
Stay fully insured for the 2027 plan year if most of these describe you: fewer than 25 enrolled employees, cash reserves that could not absorb three consecutive high-claims months, a known high-cost claimant already in the group or a pending large claim, no internal capacity to own a compliance calendar and no benefits partner to hand it to, or leadership that values a flat predictable number over the chance at savings.
Who should look seriously at self funding or level funding?
Run the analysis if most of these are true: 50 or more enrolled employees, or 30-plus with a strong cash position. A renewal increase above 8 percent with no clear explanation from the carrier. Stable headcount and low turnover. Healthy demographics relative to your industry. A desire to see claims data and act on it. Multi-state employees, where state mandate variation makes a uniform fully insured design awkward.
How to run the comparison before your renewal
Most January 1 renewals require a decision by early to mid November. Working backward from there:
| When | What happens |
| September | Request your renewal quote and, if the carrier will provide it, a claims and large-claimant summary. Get quotes on all three funding models: fully insured, level funded, and self funded. |
| Early October | Model each option at expected claims, at 100 percent of expected, and at the aggregate stop-loss maximum. The right comparison is premium versus the worst case you would actually be exposed to, not premium versus expected claims. |
| Mid October | Underwrite the stop-loss. Specific deductible, aggregate attachment point, contract basis, and whether it includes lasering of known claimants. This is where the real risk lives and where inexperienced buyers get hurt. |
| Late October | Confirm the compliance handoff. Who files the 5500, calculates PCORI, runs 105(h) testing, administers COBRA, and produces the SPD. |
| Early November | Decide, sign, and open enrollment. |
If your renewal quote arrived and you have not yet modeled the alternatives, you still have time, but not much.
Where Kona HR fits
Kona HR runs the funding analysis for employers every renewal season. That means modeling fully insured, level funded, and self funded side by side against your actual census and claims history, negotiating stop-loss terms rather than accepting the first quote, and then owning the compliance calendar so the filings do not become your problem. We support businesses nationwide from offices in New York, Palm Beach, Denver, Southport, and Richmond.
The goal is not to move you to self funding. It is to make sure you are not paying a risk-transfer premium you do not need, or taking on risk you cannot carry.
Frequently Asked Questions
In a fully insured plan the employer pays a fixed premium and the insurance carrier pays all claims and carries all risk. In a self insured plan the employer funds claims directly, uses a third-party administrator to process them, and buys stop-loss insurance to cap exposure. The employer keeps any surplus in a good year and absorbs claims up to the stop-loss limit in a bad one.
For most employees it means very little day to day. The ID card, the network, and the claims process usually look identical because self-funded plans typically use a major carrier’s network and administrator. The difference is that the employer, not the carrier, funds the claim and designs the benefits.
It can be better, because the employer can design coverage around the actual workforce instead of choosing from filed products. The risk is that an employer who self funds without adequate reserves or proper stop-loss may face pressure to reduce benefits. Sound stop-loss placement prevents that.
A level funded plan is a self-insured plan paid as a fixed monthly amount covering expected claims, administration, and stop-loss, with a possible surplus refund if claims come in low. It is treated as self insured for compliance purposes and is the most common entry point for employers with 30 to 150 employees.
There is no legal minimum. Practically, level funding works from roughly 30 employees and traditional self funding becomes reliable at 50 to 100 or more, because larger groups have more statistically predictable claims. Cash reserves and claims history matter more than headcount alone.
No. ERISA preempts state insurance mandates for self-funded plans, which is why multi-state employers often prefer them. Self-funded plans remain subject to federal requirements including ERISA, HIPAA, COBRA, the ACA, and Section 105(h) nondiscrimination rules.
The employer, as plan sponsor. The fee is reported and paid on the second-quarter IRS Form 720 by July 31 following the plan year end, at $3.84 per covered life for plan years ending on or after October 1, 2025 and before October 1, 2026. On fully insured plans the carrier pays it inside the premium.
Almost always no, and it is rarely advisable. Funding changes align with the plan year and require new stop-loss underwriting, a new plan document, and a new administrative setup. Start the analysis 90 to 120 days before renewal.
Get the funding comparison before your renewal deadline
Send us your renewal quote and your census. Kona HR will model fully insured, level funded, and self funded against your actual claims history, underwrite the stop-loss properly, and tell you which one your business should be in for 2027.
