The Regulatory Horizon: Where Federal and State Policy Is Moving on Self-Funded Plans

The regulatory environment for self-funded plans is not static. The direction of movement is toward more regulation, more disclosure, and more enforcement. Federal legislative proposals would expand ACA requirements to self-funded plans, mandate certain benefit designs, or restrict ERISA preemption. State legislative activity is increasing, with multiple states considering laws that would affect level funded plans directly or through stop loss regulation. DOL regulatory priorities continue to expand the specificity of what compliance requires. This article assesses the regulatory direction as of the publication date, focusing on structural trends rather than predicting specific legislative outcomes. TPAs, employers, and brokers should plan for a more regulated environment rather than assuming the current framework persists indefinitely.

Federal Legislative Proposals

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Congress periodically considers legislation that would affect the regulatory treatment of self-funded plans. While no significant legislation has passed, the proposals indicate the direction of policy interest.

ERISA preemption restriction proposals would narrow the preemption that allows self-funded plans to operate outside state insurance law. The motivation is state regulatory access: state insurance commissioners and attorneys general argue that ERISA preemption prevents them from enforcing consumer protections, collecting data, and ensuring market stability. Proposals range from narrow carve-outs that would allow state enforcement of specific provisions to broader restructuring that would subject self-funded plans to state insurance regulation entirely.

The impact of preemption restriction would be significant for level funded. Self-funded plans currently operate under a uniform federal framework. State-by-state regulatory requirements would increase compliance burden substantially. Multi-state employers would face different rules in different states. The regulatory arbitrage that drives the level funded market would narrow or disappear depending on what state requirements applied.

ACA expansion proposals would extend requirements currently limited to the fully insured market to self-funded plans. Essential health benefit mandates, community rating, and medical loss ratio requirements have been proposed for application to self-funded plans. The rationale is market fairness: if fully insured plans must comply with these requirements, allowing self-funded plans to avoid them creates an uneven playing field and incentivizes risk selection out of the regulated market.

If essential health benefits applied to self-funded plans, plan design flexibility would be substantially constrained. If community rating applied, the underwriting advantage that allows level funded to offer lower rates to healthy groups would disappear. If MLR requirements applied, the administrative economics of level funded would change. Each of these extensions would narrow the gap between level funded and fully insured, reducing the economic advantage of level funded for employers who currently benefit from it.

Pharmacy benefit reform is the most likely area of near-term federal legislative action affecting self-funded plans. PBM transparency, rebate pass-through requirements, and drug pricing provisions have bipartisan support and are included in multiple pending bills. These provisions would apply to all group health plans including self-funded. The impact would be operational: changes to how PBMs contract with plans, how rebates flow, and how pharmacy benefits are administered. The direction is toward more transparency and potentially more complexity in pharmacy benefit management.

State Legislative Activity

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States are more active than Congress in legislating on level funded and stop loss. The trend is toward more restrictive treatment.

Several states have considered or introduced legislation that would apply small group market rules to level funded arrangements where the employer bears minimal risk. Colorado has received the most attention in industry discussions, with the state’s Division of Insurance scrutinizing level funded arrangements and the legislature enacting stop loss data collection requirements. However, level funded products continue to be sold in Colorado. Other states have introduced bills that would restrict level funded availability or impose additional requirements. The states considering such legislation view level funded as regulatory arbitrage that undermines the fully insured small group market. Healthy groups leave the community-rated pool for level funded, where they can benefit from their favorable experience. The remaining pool becomes sicker and premiums increase. States have an interest in maintaining viable small group markets, and restricting level funded is one approach under consideration.

If multiple states adopt restrictive treatment of level funded, the geographic market narrows substantially. An employer in a state that applies small group market rules to level funded faces fully insured market conditions. The regulatory advantage of level funded is eliminated in that state. TPAs and stop loss carriers that built business in those states face market exit or product restructuring.

Stop loss regulation tightening is more common than outright reclassification. States are raising minimum attachment points, adding disclosure requirements, and imposing other conditions on stop loss insurance. The NAIC Stop Loss Insurance Model Act provides a baseline, but states can exceed it. A state that raises the minimum specific attachment point from $20,000 to $40,000 increases employer risk exposure in level funded arrangements. A state that requires minimum group sizes for stop loss issuance restricts level funded availability for micro-employers.

The trend in stop loss regulation is toward more restrictive terms. Few states are loosening stop loss requirements. Many are considering tightening. Each state that acts increases regulatory complexity for carriers and TPAs operating nationally and narrows the conditions under which level funded products can be offered.

Data reporting requirements represent a different regulatory approach. States are enacting health care claims data reporting requirements (all-payer claims databases) that may apply to self-funded plans. The Supreme Court’s decision in Gobeille v. Liberty Mutual (2016) preempted Vermont’s reporting requirement for self-funded plans, but states are testing new approaches that may survive preemption. If states can require claims data reporting from self-funded plans, one information advantage of self-funding relative to fully insured narrows. Plan sponsors would have to report data to state databases, creating administrative burden and potentially affecting how plans are evaluated by state regulators.

State enforcement under federal delegation creates pathways for state regulatory influence that do not require overcoming ERISA preemption. The No Surprises Act delegated enforcement authority to states. Other federal provisions may follow the same model. States are building enforcement infrastructure to exercise this delegated authority. A state attorney general can investigate a self-funded plan’s No Surprises Act compliance without facing ERISA preemption challenges because the state is enforcing federal law under delegation. This is a structural shift: states are finding ways to affect self-funded plans that avoid the preemption barrier.

DOL Regulatory and Enforcement Priorities

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The Department of Labor is expanding the specificity of what compliance requires for self-funded plans.

Current enforcement priorities focus on MHPAEA compliance, particularly the NQTL comparative analysis requirement. Fiduciary compliance for service provider selection and monitoring is a stated priority. Plan document and disclosure adequacy are part of routine enforcement. CAA compliance, including broker disclosure and RxDC reporting, is entering the enforcement agenda. Cybersecurity for plan fiduciaries is emerging as a priority.

The direction is toward more guidance and more specificity. DOL is issuing Field Assistance Bulletins, Technical Releases, and FAQ series that expand the detail of compliance requirements. More specificity makes compliance more achievable for plans that engage with the guidance but creates more specific standards against which non-compliance is measured. The plan sponsor who has not read the guidance cannot claim ignorance when DOL cites a specific requirement from a published bulletin.

Potential new requirements are signaled in DOL priority statements and advisory processes. Cybersecurity standards for employee benefit plans are under development. Enhanced reporting requirements for self-funded plans have been discussed. Fiduciary responsibility guidance addressing specific small plan sponsor situations is likely. Each new requirement adds to the compliance burden and creates new areas of potential exposure.

What the Trajectory Means for Level Funded

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The regulatory trend has structural implications for how level funded operates and who benefits from it.

Compliance costs are rising. RxDC reporting, broker disclosure management, No Surprises Act administration, cybersecurity protocols, and expanded documentation requirements all add cost. For self-funded plans above 50 employees, NQTL analysis adds another layer. For large self-funded plans, these costs are absorbed across a large participant base. For small level funded plans, the per-member compliance cost is disproportionately high even for those requirements that do apply regardless of size, such as RxDC reporting and preventive care mandates.

If compliance costs for small self-funded plans approach or exceed the cost savings from avoiding fully insured premiums, the economic rationale for level funded weakens for the smallest groups. The employer who saves $300 per member per year by choosing level funded but faces $200 per member per year in compliance costs is capturing much less advantage than the headline savings suggest.

The TPA compliance imperative is intensifying. As regulatory requirements increase, the TPA’s role as compliance administrator becomes more critical. TPAs that invest in compliance infrastructure will differentiate themselves. TPAs that do not will expose their employer clients to regulatory risk. The compliance quality gap between TPAs may become the most important differentiator in the level funded market. An employer choosing between two TPAs with similar administrative fees but different compliance capabilities should weight compliance heavily.

The durability of regulatory arbitrage is uncertain. Series 01 argued that level funded is regulatory arbitrage. ERISA preemption, freedom from state mandates, and exemption from community rating create advantages for self-funded plans that fully insured plans cannot capture. If the regulatory gap narrows through state reclassification, stop loss restrictions, or federal extensions of ACA requirements, the arbitrage advantage shrinks.

The regulatory trend is toward narrowing the gap, not widening it. State action is increasing. Federal proposals recur. DOL enforcement expands within the existing framework. This does not mean level funded disappears. Level funded serves real employer needs for cost transparency, plan design flexibility, and data access. But the advantages may shift from regulatory (preemption, no mandated benefits, no premium tax) to operational (claims data transparency, cost management tools, plan design capability).

The TPAs and carriers that build value on operational excellence rather than regulatory arbitrage are better positioned for a more regulated environment. The TPA that provides superior claims administration, effective cost management, and strong compliance support delivers value that persists even if regulatory requirements increase. The TPA that provides value primarily through regulatory cost avoidance may find that value eroded as the regulatory environment tightens.

Planning for the Environment That Is Coming

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Plan sponsors, TPAs, and brokers should evaluate their current position against a more regulated future scenario.

Plan sponsors should assess their compliance infrastructure against current requirements and build capacity for additional requirements. The plan sponsor who is compliant with today’s requirements and has systems for adapting to new requirements is positioned better than the plan sponsor who is behind on today’s requirements and has no compliance infrastructure.

TPAs should evaluate their compliance offerings against what employers will need as requirements expand. A TPA that cannot provide NQTL analysis support, RxDC reporting administration, and broker disclosure management is not meeting current needs. A TPA that cannot adapt to new requirements as they emerge will fall behind competitively.

Brokers should counsel clients on regulatory trajectory, not just current rules. A broker who recommends level funded without discussing the regulatory risks is providing incomplete advice. The regulatory environment for level funded is more favorable today than it may be in five years. Clients should understand that.

The regulatory horizon is not a reason to avoid level funded. It is a reason to approach level funded with clear understanding of the regulatory environment and realistic assessment of where that environment is moving.