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Syam Adusumilli
The Architecture of Level Funded · LFP-01.06

Executive Summary: Who Touches the Money: TPA, Stop Loss Carrier, Reinsurer, Employer, and Broker

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

LFP-01.06 — The Architecture of Level Funded
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Five parties have financial relationships in a level funded arrangement. Each is compensated differently, bears different risk, and operates under incentives that are not always aligned with the employer’s.

The employer pays everything and bears the most risk. Monthly payments fund the claims fund, stop loss premium, and administrative fee. PCORI fees are an ERISA compliance obligation fully insured employers do not face. The employer carries claims risk within the aggregate corridor, deficit liability per contract terms, and renewal risk that can produce stop loss premium increases of 20 percent or more after a bad claims year. Fiduciary responsibility under ERISA Section 1104 requires acting in plan participants’ interest across all vendor and plan design decisions. Most small employers sponsoring level funded plans do not know they accepted this obligation.

The TPA earns the administrative fee PMPM regardless of claims experience, so its financial incentive is account retention. Beyond the disclosed fee, the TPA may earn undisclosed margin on network access if the discount passed to the plan is smaller than the discount negotiated. If the TPA manages the PBM relationship through a spread arrangement rather than pass-through, it may retain manufacturer rebates without the employer’s awareness. The TPA holds employer money and decides how to spend it through claims adjudication while formal fiduciary responsibility sits with the employer, a governance gap ERISA does not cleanly resolve.

The stop loss carrier’s most consequential tool is the laser: a member-specific attachment point at or above a known high-cost member’s expected annual claims, excluding that member from standard stop loss protection. Major carriers include Sun Life, Voya Financial, Symetra, HM Insurance Group, and Tokio Marine HCC, plus carrier-affiliated operations from UnitedHealthcare and Cigna.

The reinsurer stands behind the stop loss carrier and is invisible to the employer. When reinsurance capacity tightens, stop loss premiums increase across the market regardless of individual group experience.

The broker influences product, TPA, and carrier selection and bears zero financial risk. The CAA of 2021 requires disclosure of all direct and indirect compensation including overrides and production bonuses, but compliance is uneven. The employer should understand the broker’s full compensation before evaluating the recommendation.