Executive Summary: The Mechanics of Level Funded: How the Money Actually Moves
LFP-01.01 — The Architecture of Level Funded#
The employer pays a single monthly amount that looks, schedules, and processes exactly like a fully insured premium. It is not a premium. It is three separate financial instruments bundled into one check, and the distinction between them determines what the employer owns, what risk they carry, and what they can recover at year-end.
The claims fund is the largest component, representing approximately 55 to 75 percent of the total monthly payment. It is employer money, sized by stop loss carrier actuarial underwriting based on the group’s expected claims for the plan year. The stop loss premium, at roughly 15 to 30 percent of the monthly payment, purchases specific stop loss (reimbursing the plan when any individual member’s claims exceed the specific attachment point, commonly $25,000 to $75,000 for small groups) and aggregate stop loss (reimbursing when total group claims exceed the aggregate attachment point, typically 120 to 125 percent of expected claims). The administrative fee, at approximately 8 to 15 percent, compensates the TPA for claims adjudication, network access, member services, and compliance. It is fixed per member per month and does not vary with claims.
Where the claims fund is held determines the employer’s legal position if the TPA becomes insolvent. Funds in a formal ERISA trust account are plan assets, legally separated from TPA assets, and not available to TPA creditors. Funds in TPA operating accounts with accounting segregation are commingled, making the employer a general creditor in insolvency. ERISA Section 1103 establishes that plan assets should be held in trust, but whether a specific arrangement satisfies that standard depends on the contract.
The aggregate corridor is the employer’s primary risk zone. For a 25-employee group with $250,000 in expected claims and an aggregate attachment point at 125 percent, the corridor is $62,500. Claims landing there are not reimbursed by either the depleted claims fund or the stop loss policy.
The plan year cash flow runs twelve months of contributions and claims, followed by a run-out period of 60 to 90 days for late-submitted claims, then reconciliation. Total time from plan year end to final settlement commonly runs five to nine months.
Ownership is split. The employer owns the claims fund balance, the claims data, and the plan document. The employer does not own the stop loss policy terms, the network access contracts, or the TPA’s administrative infrastructure. Three questions determine the financial outcome of any level funded arrangement: how the claims fund is held and what protections apply if the TPA fails, what the contract says about surplus return and deficit liability, and what the run-out and settlement timeline looks like.