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Syam Adusumilli
The Architecture of Level Funded · LFP-01.02

Executive Summary: Level Funded, Fully Insured, Self-Funded: Three Architectures, Not Three Products

By Syam Adusumilli · 2 min read
Executive Summary Read the full article.

LFP-01.02 — The Architecture of Level Funded
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Placing level funded on a spectrum between fully insured and self-funded, as if the three were product tiers differentiated by complexity or risk tolerance, produces purchasing decisions made on the wrong criteria. They are three architectures with different risk ownership structures, different regulatory treatment, and different capital requirements.

In a fully insured arrangement, all claims risk belongs to the carrier the moment the premium is received. The employer has no surplus claim, no usable claims data, and no plan design flexibility beyond state-mandated benefit floors. State premium taxes apply, ranging from approximately 1.75 to 4 percent. Traditional self-funding places all claims risk on the employer, funded from operating capital. Large employers manage without stop loss because statistical variance is stable across thousands of covered lives. Small employers cannot — one bad claim can consume an entire annual budget for a 25-person group.

Level funded borrows the fixed monthly payment and bundled product experience from fully insured, and borrows employer ownership of the claims fund, ERISA preemption, claims data access, and plan design flexibility from self-funded. What it adds is the aggregate stop loss packaged by design, converting unpredictable small-group claims variance into a defined maximum annual liability. By 2024, KFF reported 36 percent of covered workers at small firms in level funded plans, up from 7 percent in 2019.

Level funded is structurally self-funded. The employer owns the claims fund, operates under ERISA, holds the claims data, and is governed by federal rather than state regulation. Treating it as similar to fully insured produces three errors: failing to recognize a surplus claim may exist; failing to understand that state mandated benefits do not apply; and failing to understand that the employer has accepted ERISA fiduciary obligations that fully insured employers do not carry.

Employers evaluating any of the three architectures need architecture answers before product answers: who owns the risk, who owns the data, what happens to surplus, what regulatory framework governs the plan, and what legal obligations the employer has accepted.