Executive Summary: Surplus, Deficit, and Reconciliation: What Happens When the Plan Year Ends

LFP-01.05 — The Architecture of Level Funded

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Reconciliation is where the level funded architecture shows its actual economics. The number that appears on the settlement statement after the run-out period closes is either positive (surplus) or negative (deficit), and how that number is treated is the diagnostic test for whether a level funded plan is structurally self-funded or functionally fully insured with a different label.

Surplus forms when actual claims come in below the actuarially funded amount. What happens to it depends entirely on contract terms that vary significantly across the market. Some contracts return 100 percent to the employer. Some return approximately 50 percent, with the retained portion going to the carrier or TPA. Some retain all surplus, leaving the employer with no financial upside despite carrying self-funded structure and fiduciary obligations. UnitedHealthcare Level Funded, Aetna Funding Advantage, and Starmark (Trustmark) handle surplus differently, and the variation is often not visible at the point of sale. Timing adds further opacity: surplus is not returned at plan year end. The run-out period (60 to 90 days), reconciliation processing, and distribution together mean the employer commonly waits five to nine months after plan year end for any settlement.

Deficit forms when claims exceed the claims fund but stay below the aggregate stop loss attachment point. That corridor is the employer’s unprotected zone. For a 25-person group with $250,000 in expected annual claims and an aggregate at 125 percent, the corridor is $62,500. Some contracts require additional payments from the employer to close the deficit. Some absorb it through the carrier, effectively capping employer liability at the twelve monthly payments already made. Small groups face materially higher corridor risk than large groups because statistical variance relative to expected claims is larger at small group sizes.

Most employers do not verify the reconciliation statement. Claims paid should be checked against periodic reporting, stop loss recoveries confirmed as correctly applied, and surplus calculations tested against the specific contract language. A broker who performs this review as standard practice adds measurable value.

The diagnostic question is simple: if the employer receives full surplus return and bears real deficit risk, the plan operates as self-funded. If the carrier retains surplus and absorbs deficit, the plan operates as fully insured regardless of its legal structure. Ask at enrollment and at every renewal what percentage of surplus was returned to comparable groups last year, and what the average deficit liability was. The refusal to answer is itself informative.