The Mechanics of Level Funded: How the Money Actually Moves

The employer pays a single monthly amount. The amount looks like a premium. It arrives on the same schedule as a fully insured premium. It is deducted from payroll on the same cycle. The employer’s HR team processes it through the same accounting line. Everything about the payment is designed to feel like insurance.

It is not insurance. It is three separate financial instruments bundled into one check.

The first is a claims fund. This is employer money, set aside to pay health care claims as they occur during the plan year. The employer owns this money. If claims are low, the balance belongs to the employer. If claims are high, the fund depletes, and the employer’s exposure depends on the terms of the second instrument.

The second is a stop loss policy. This is genuine insurance, purchased from a stop loss carrier, protecting the employer against catastrophic individual claims and against total group claims exceeding a defined threshold. The stop loss premium is the only portion of the monthly payment that functions as traditional insurance premium.

The third is an administrative fee. This compensates the third-party administrator for running the plan: adjudicating claims, providing network access, managing compliance, serving members, and reporting to the employer. The TPA earns this fee regardless of claims experience. It is not risk-bearing compensation.

The bundling is what makes level funded feel like fully insured to the employer writing the check. The unbundling is what makes it structurally different. Understanding level funded requires following each dollar from employer payroll through claims payment, stop loss recovery, and year-end settlement.

The Three Components and Their Proportions

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The claims fund is the largest component. For a typical small group, it represents approximately 55 to 75 percent of the total monthly payment. The exact proportion is set by the stop loss carrier’s actuarial underwriting, which models expected claims for the specific group based on age, gender, geographic location, industry, and whatever health status information is available at enrollment or renewal. The funded amount is not a guess. It is the stop loss carrier’s best estimate of what the group will spend on health care claims during the plan year, expressed as a monthly contribution that accumulates in an account dedicated to paying those claims.

The claims fund is not premium in the regulatory or economic sense. When an employer pays a fully insured premium, that money belongs to the carrier the moment it is received. The carrier assumes the obligation to pay claims and keeps whatever remains. In a level funded arrangement, the claims fund contribution remains employer money. It is held in a trust account, a custodial account, or in some arrangements in the TPA’s operating accounts with accounting segregation. The legal ownership distinction between these arrangements matters, and the article returns to it below.

The stop loss premium is the second-largest component, typically representing approximately 15 to 30 percent of the total monthly payment. This purchases two separate policies from a stop loss carrier such as Sun Life, Voya, Symetra, HM Insurance Group (a Highmark Health subsidiary), Tokio Marine HCC, or one of the carrier-affiliated stop loss operations run by UnitedHealthcare or Cigna. The specific (or individual) stop loss policy reimburses the plan when any single member’s claims exceed a per-member threshold called the specific attachment point. The aggregate stop loss policy reimburses the plan when total group claims exceed a whole-group threshold called the aggregate attachment point. These two policies together convert what would otherwise be unlimited employer exposure into a capped annual liability. The stop loss premium varies significantly by group demographics, attachment point selection, and the carrier’s assessment of the group’s risk profile.

The administrative fee is the smallest component, typically approximately 8 to 15 percent of the total monthly payment. It is a fixed per-member-per-month amount that compensates the TPA for the operational machinery of running the plan. The fee does not fluctuate with claims. A year with zero claims and a year with catastrophic claims produce the same administrative fee revenue for the TPA. This fixed-fee structure means the TPA’s financial incentive is account retention, not claims management. The distinction matters when evaluating TPA performance.

The Kaiser Family Foundation’s annual Employer Health Benefits Survey provides the most widely cited data on employer health plan costs, reporting average premiums for single and family coverage across fully insured and self-funded plans. For level funded specifically, the component split data is thinner. The Self-Insurance Institute of America publishes periodic surveys on self-funded plan economics, but the granularity of publicly available component-level data remains limited. Most of what is known about typical splits comes from broker experience with carrier proposals and from the carriers’ own marketing materials.

The Claims Fund in Operation

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Claims flow through the fund on a predictable path. A plan member receives care. The provider submits a claim to the TPA. The TPA adjudicates the claim against the plan document, applies network discounts, calculates the member’s cost-sharing obligation, and processes payment from the claims fund. The fund balance decreases with each paid claim. The employer typically does not see individual claims in real time but receives periodic reporting, monthly or quarterly, showing aggregate claims against the fund.

The mechanical simplicity of claims payment obscures an important structural question. The money sits somewhere between the employer’s payroll account and the provider’s bank. Who holds it, and under what legal arrangement, determines whether the employer’s claims fund is protected.

Some level funded products hold the claims fund in a formal trust account established under the plan’s ERISA trust agreement. A trust account provides legal separation of employer funds from TPA assets. The money in the trust is a plan asset, subject to ERISA fiduciary protections, and is not available to the TPA’s creditors if the TPA becomes insolvent. Other level funded products hold the claims fund in the TPA’s operating accounts with accounting segregation. The segregation means the TPA tracks the employer’s fund balance as a separate line item in its books, but the money is commingled with the TPA’s own operating funds or with other employers’ claims funds. If the TPA becomes insolvent, the employer’s claim on those commingled funds depends on the contract language, the state of the TPA’s assets, and the bankruptcy process.

The distinction between trust accounts and accounting segregation is not academic. TPA insolvency, while not common, occurs. When it does, employers with trust-held claims funds have a legal claim on identifiable, segregated assets. Employers with accounting-segregated funds have a general creditor claim on the TPA’s estate. The Department of Labor’s guidance on ERISA trust requirements establishes that plan assets should be held in trust for the exclusive purpose of providing benefits to participants and defraying reasonable plan administration expenses (Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1103). Whether a particular level funded arrangement satisfies this requirement depends on the specific custodial structure.

The claims fund is not a reserve in the insurance sense. Fully insured carriers hold statutory reserves against future claims obligations, required by state insurance regulators and backed by carrier capital. The level funded claims fund is operating capital for current-year claims. It can be depleted before the plan year ends. When it is depleted, what happens next depends on the aggregate stop loss terms and the specific contract between the employer, the TPA, and the stop loss carrier. In some arrangements, the TPA continues paying claims from its own funds and seeks reimbursement from the employer or from the aggregate stop loss carrier once the aggregate attachment point is reached. In others, the employer must make additional contributions to replenish the fund. The mechanics of fund depletion are where the employer’s actual risk exposure becomes visible, and they vary enough across products that no single description covers the market.

The Stop Loss Policy

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The stop loss policy is the risk transfer mechanism that makes level funded viable for small employers. Without stop loss, an employer with 25 employees would face open-ended financial exposure to health care claims. A single member with a premature infant, a cancer diagnosis, or a traumatic injury could generate claims exceeding the employer’s total annual health care budget. Stop loss converts that unlimited exposure into a defined maximum annual liability.

Specific stop loss protects against any single member’s claims exceeding the specific attachment point during the plan year. Common specific attachment points for small groups generally range from approximately $25,000 to $75,000 per member per year, though the range varies by carrier, group demographics, and plan design. The attachment point selection is a trade-off: lower attachment points provide more protection but cost more in stop loss premium. Higher attachment points reduce premium but increase the employer’s per-member exposure. Once a member’s claims exceed the specific attachment point, the stop loss carrier reimburses the plan for claims above that threshold. The employer bears 100 percent of each member’s claims up to the attachment point. For a 25-person group with a $50,000 specific attachment point, the employer is responsible for the first $50,000 of any single member’s annual claims. The stop loss carrier covers the rest, up to the policy’s maximum benefit, which is commonly $1 million or $2 million per member depending on the carrier and product.

Aggregate stop loss protects against total group claims exceeding the aggregate attachment point during the plan year. The aggregate attachment point is commonly set at approximately 120 to 125 percent of expected claims for the group, though this varies by carrier and risk profile. If the expected claims for a 25-person group are $250,000, the aggregate attachment point might be set at $312,500 (125 percent). Total group claims below $312,500 are the employer’s responsibility, funded through the claims fund. Total group claims above $312,500 trigger the aggregate stop loss, and the carrier reimburses the excess.

The gap between expected claims and the aggregate attachment point is the aggregate corridor. Claims that fall within this corridor are the employer’s risk zone. This corridor is where the level funded employer bears genuine financial risk that a fully insured employer does not. The corridor is the structural price of the potential upside: if claims stay below expected, the employer may receive a surplus. If claims land in the corridor, the employer bears the cost. If claims exceed the corridor, the aggregate stop loss carrier steps in.

Specific and aggregate stop loss operate independently. A group could have no member exceed the specific attachment point but still see total claims exceed the aggregate attachment point, because the accumulation of many moderate claims pushes the total above the threshold. Conversely, one member’s catastrophic claims could trigger the specific policy while total group claims remain well below the aggregate threshold because the rest of the group was healthy. Both policies can trigger in the same plan year.

The stop loss policy is annual. It does not carry over from one plan year to the next. Each plan year requires new underwriting and new premium. The stop loss carrier evaluates the group’s claims experience from the prior year and adjusts attachment points, premium, and terms accordingly. A group that had a bad claims year will face higher stop loss premium at renewal. A group that had a member diagnosed with a known high-cost condition may face a laser: a member-specific attachment point set at or above the known annual cost of that member’s care, effectively excluding that member from standard stop loss protection. The annual underwriting cycle is where renewal risk lives, and Series 02 examines the stop loss architecture in depth.

The TPA and the Administrative Fee

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The TPA is not the insurer. The TPA is the operator. The administrative fee buys a bundle of services that the employer cannot provide for itself. The TPA adjudicates and pays claims. It provides network access, typically through PPO network rental agreements with organizations like PHCS/Multiplan or First Health, or through direct provider contracts. It manages utilization through prior authorization and concurrent review. It handles member-facing operations: ID cards, eligibility verification, customer service. It administers compliance obligations including SPD production, SBC distribution, COBRA, PCORI fee payment, and CAA reporting. It reports to the employer on claims experience and plan performance.

The administrative fee typically does not cover broker commissions, which are paid separately as a PMPM add-on or as a percentage of total premium. It may or may not include pharmacy benefit management depending on whether the TPA bundles or separates PBM services. Specific value-added services such as telemedicine platform fees, disease management programs, or second opinion services may carry additional charges beyond the base administrative fee.

The administrative fee is where TPA quality diverges most visibly. Two TPAs charging the same PMPM can deliver substantially different claims processing accuracy, network discount depth, utilization management rigor, compliance thoroughness, and reporting granularity. The employer has limited ability to evaluate this divergence before purchasing. Broker recommendations are the primary evaluation mechanism, and broker recommendations are influenced by the broker’s own financial relationships with TPAs, which LFP-01.06 examines.

The Society of Professional Benefit Administrators publishes benchmarking data on TPA administrative performance, and URAC accreditation provides a third-party quality marker, but neither source gives the prospective employer a reliable prediction of what their specific administrative experience will be. Series 05 examines TPA operational quality in depth.

The Plan Year Cash Flow Cycle

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The complete cash flow cycle for a level funded plan runs from the first monthly payment through year-end settlement. Tracing it through twelve months for a hypothetical 25-employee group makes the mechanics concrete.

Month one. The employer makes the first monthly payment. The payment splits into claims fund contribution, stop loss premium, and administrative fee. The claims fund begins accumulating. The first claims are submitted by providers as employees begin using their coverage. The fund balance reflects contributions received minus claims paid.

Months two through eleven. The cycle repeats. Monthly contributions add to the claims fund. Claims are adjudicated and paid from the fund. The employer receives periodic reporting showing whether claims are running above or below the expected level. If claims are running below expected, the fund balance grows. If claims are running above expected, the fund balance shrinks. The stop loss premium accumulates with each monthly payment, and the stop loss carrier monitors claims against the specific and aggregate attachment points. If a member’s claims approach the specific attachment point, the TPA may begin preparing the stop loss claim. If total claims approach the aggregate attachment point, the TPA and stop loss carrier begin coordinating on the aggregate claim.

Month twelve. The employer makes the final monthly payment. Claims incurred through the plan year end date are eligible for payment from the fund. The plan year closes for new claims incurrence, but the run-out period begins.

The run-out period is the window, commonly 60 to 90 days after the plan year ends, during which claims incurred before the plan year end date but not yet submitted by providers can still be processed and paid from the claims fund. A member who sees a specialist on the last day of the plan year may not have that claim submitted by the provider for weeks or months. The run-out period exists to capture these trailing claims. It is a necessary accounting mechanism, but it delays settlement. Employers who expect to receive a surplus check on the day the plan year ends are misunderstanding the timeline.

After the run-out period closes, the TPA compiles the final claims report. Total claims paid from the fund during the plan year and run-out period are tallied. Stop loss recoveries, both specific and aggregate, are applied. The claims fund balance is calculated net of all claims and recoveries. The result is either a surplus (positive balance) or a deficit (negative balance, meaning claims exceeded the funded amount but stayed below the aggregate attachment point). The settlement process, including surplus return or deficit resolution, is governed by the contract terms and is the subject of LFP-01.05.

The total timeline from plan year end to final settlement is commonly five to nine months: the run-out period (approximately two to three months) plus reconciliation processing (approximately one to three months) plus surplus distribution or deficit resolution (approximately one to three months). These timelines vary by TPA and contract terms. An employer entering a level funded arrangement should understand that the financial outcome of any plan year will not be known for roughly half a year after that plan year ends.

What the Employer Actually Owns

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The ownership structure is the argument of this article and the foundation of the series. In a fully insured arrangement, the carrier owns everything. The premium belongs to the carrier the moment it is received. The claims data generated by plan utilization is carrier property. The surplus from favorable claims experience is carrier profit. The risk of unfavorable claims experience is the carrier’s problem. The employer’s ownership interest in the plan is limited to the contractual right to receive the covered benefits for the premium paid.

In a level funded arrangement, ownership is split. The employer owns the claims fund balance, subject to the contract terms governing surplus treatment. The employer owns the claims data generated by plan utilization, subject to the TPA’s reporting practices and any contractual limitations on data access. The employer owns the plan document and, through it, the design flexibility that ERISA provides for self-funded plans.

The employer does not own the stop loss policy in the sense of having control over its terms. The employer is the policyholder, but the stop loss carrier sets the attachment points, the premium, the laser provisions, and the renewal terms. The employer does not own the network access. The TPA’s network contracts are TPA assets, and the employer accesses those networks through the TPA relationship. If the employer changes TPAs, the network may change. The employer does not own the administrative infrastructure. The TPA’s claims processing systems, compliance apparatus, and member services operation belong to the TPA.

The split ownership is the source of both the advantages and the vulnerabilities of the level funded architecture. On the advantage side, the employer can receive surplus when claims run low. The employer has claims data that fully insured carriers do not share. The employer can design benefits outside state mandated requirements. ERISA preemption reduces regulatory cost for multi-state employers. On the vulnerability side, the employer accepts fiduciary responsibility under ERISA. The stop loss carrier’s annual underwriting creates renewal risk the employer cannot control. The employer depends on the TPA’s operational quality for every aspect of plan administration. Transparency gaps persist despite level funded’s market positioning.

The rest of this series examines each of these in structural detail. LFP-01.02 establishes the architectural distinction between level funded, fully insured, and traditional self-funded. LFP-01.03 traces the ERISA preemption that makes level funded legally viable. LFP-01.04 provides the market history that explains why level funded emerged when it did. LFP-01.05 maps the reconciliation mechanics where the plan’s actual economics become visible. LFP-01.06 follows the money through all five parties who touch it. LFP-01.07 evaluates the structural advantages and vulnerabilities with the specificity that marketing materials omit.