Level-Funded Health Plans in 2027: How the Surplus Works and When It Backfires

Level-funded plans sell on one line: pay a flat amount every month, and get money back if your people stay healthy. That is roughly true. What the pitch leaves out is that you become the plan sponsor of a self-insured plan, with the filings and the renewal risk that come with it.

This post explains the mechanics, the failure mode, and where level funding sits next to the two reimbursement options already covered on our group health insurance page.

What is a level-funded health plan?

It is a self-insured plan with a fixed monthly bill. Small employers buying group coverage normally pay a premium to a carrier that owns the claims risk. In a self-insured plan, the employer collects contributions and takes on responsibility for paying medical claims, often contracting with a third-party administrator for enrollment, claims processing, and network access.

Level funding smooths that out. Small businesses that self-insure assume financial responsibility for employee health costs while buying stop-loss insurance and administrative services, and these arrangements are called level funded because the plan’s costs are spread evenly across 12 months, which reduces variability for the employer. Your monthly payment is split three ways: claims funding, the stop-loss premium, and administration.

How is it different from fully insured and self-funded coverage?

The difference that matters most is pricing. ACA-regulated small-group plans are community rated, so insurers cannot use enrollees’ health history when setting premiums, and rates can vary only by age, geographic location, family size, and tobacco use. Self-insured plans, including level-funded ones, are generally exempt from community rating and from the essential health benefits requirement, though they still must follow many other ACA provisions such as covering preexisting conditions.

That is why level-funded plans can be medically underwritten. Carriers can ask for health questionnaires or prior claims data and can decline a group. A community-rated small-group plan cannot do either.

How does the claims surplus actually work?

Your monthly payment funds a claims account sized to expected use for your census. Claims are paid out of it all year. After the plan year closes and a run-out period passes, the administrator reconciles what was funded against what was paid.

If claims came in under the funded amount, the contract decides what happens to the difference. Some agreements return a share in cash, some apply it as a credit to the following year, and some retain part of it. The surplus is never guaranteed, and the percentage returned is a negotiated contract term, not a market standard. Ask for the settlement provision in writing and confirm the tax treatment with your CPA.

What happens in a bad claims year?

Two things protect you during the year. Specific stop-loss covers claims from one person above a set attachment point. Aggregate stop-loss covers total plan claims above a set threshold. Between them, your in-year cash outlay is capped at the funded amount plus any contract-defined overage.

The damage shows up at renewal instead. The carrier re-rates your group on the claims it just paid, so one cancer case or one premature birth can produce a renewal you would not accept. You can return to the ACA small-group market, where health history cannot be used, but the fully insured rate you find may be well above what you left. For 2027, the median proposed small-group rate increase is 14 percent across 295 insurers, and 59 percent of small-group insurers are raising rates between 10 and 20 percent.

There is also a risk-pool effect worth understanding. Insurer filings suggest that growth in level-funded plans can erode the fully insured small-group pool, which may push future premiums higher for small businesses with sicker employees who cannot qualify for level funding.

Which employers fit level funding, and which do not?

Level funding tends to fit groups of roughly 10 to 50 covered employees with stable, younger demographics, low turnover, and enough cash reserve to absorb a bad year without cutting benefits. It also fits owners who will actually read the monthly claims reports and act on them.

It fits poorly when the group is very small, when one or two known high-cost conditions exist, when headcount swings seasonally, or when nobody has time to own the compliance calendar. State insurance laws generally do not apply to self-insured ERISA plans, so the state-mandated benefits your employees may expect are not automatic. Check your plan document.

Level-funded, ICHRA, or QSEHRA: which should you price first?

Price all three, in that order of complexity. A QSEHRA is the simplest: it is capped by the IRS, indexed annually, and requires that you not offer a group health plan at all, with the same terms for all full-time employees. Our QSEHRA guide for small employers covers the notice rules, and you should confirm the 2027 caps before setting allowances. [VERIFY: 2027 QSEHRA limits in the IRS annual revenue procedure, expected fall 2026]

HealthCare.gov now calls the individual coverage HRA a CHOICE Arrangement, a way for employers to reimburse employees tax-free up to a set annual amount for premiums and out-of-pocket costs, available to employers of any size with at least one employee who is not a self-employed owner or the owner’s spouse. Our post on ICHRA for small business walks through the class rules and where it fails.

One more caution on level funding: enrolling in SHOP is generally the only way an eligible small employer can claim the Small Business Health Care Tax Credit, worth up to 50 percent of the employer contribution for two consecutive years. A level-funded plan is not SHOP coverage. If you currently claim that credit, count its loss in the comparison. Pairing any of these designs with account-based savings is a separate decision, explained in our post on the difference between an HSA and an HRA.

What should you ask before you sign for January 1?

Level funding adds employer filings. Plan sponsors of self-insured plans, including level-funded plans, pay the PCORI fee on Form 720 at $3.84 per covered life for plan years ending on or after October 1, 2025 and before October 1, 2026, due July 31. Welfare plans with fewer than 100 participants that are unfunded or insured are generally exempt from Form 5500, but confirm your arrangement against that exemption with your advisor.

If the numbers are close, the tiebreaker is tolerance for a bad year. Level funding rewards a healthy group and punishes an unlucky one at renewal. Tell us which risk you would rather own, and we will model both for your January 1 date through our contact page.