Executive Summary: Multi-State Employers: Compliance and Operational Complexity Across Jurisdictions

LFP-07.04 — The Geography of Level Funded

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A 30-person employer with workers in Texas, California, and New York faces three regulatory regimes, three network realities, and three marketplace environments. ERISA preemption theoretically provides plan design uniformity. The theory does not match the operational reality for the stop loss component, network access, and employee communication compliance.

Remote work permanently changed employer geographic footprints in ways the level funded market has not fully adjusted to. Bureau of Labor Statistics data shows that 22.9% of employed persons teleworked in the first quarter of 2024; among professional and business services workers, the rate reached 41.5%. The small employers who fit the level funded profile are disproportionately represented in industries with the highest remote work rates. A 20-person software company that was single-state in 2019 may now have employees in seven states. The plan design has not changed. The compliance footprint has grown considerably.

ERISA Section 514 preempts state laws that relate to employee benefit plans. A self-funded level funded plan can provide the same benefits on the same terms to employees in Texas and Massachusetts without complying with Massachusetts’ mandated benefit requirements. That uniformity is preemption’s primary operational value. Its limits define where multi-state complexity begins. Stop loss insurance is a separate contract regulated as insurance under state law. States can impose requirements on stop loss carriers — including minimum attachment point requirements and carrier licensing — without violating ERISA preemption. The preemption covers the plan; it does not cover the insurance contract alongside it. New York Insurance Law Sections 3231 and 4317 prohibit stop loss for employers with 50 or fewer employees. The employer headquartered in Texas who adds a remote employee in New York cannot obtain stop loss coverage for that employee through the same arrangement that works elsewhere. The DOL’s Advisory Opinion 92-24A confirms ERISA preempts plan design for multi-state self-funded plans; it does not eliminate state authority over the insurance component.

The operational consequences compound. Network access that is adequate in suburban Indianapolis may be thin for a remote employee in rural North Carolina. Not all stop loss carriers are licensed in all states, and carriers may offer less competitive terms in states outside their core markets. Tax treatment of stop loss premiums varies by state and requires allocation for multi-state employers at the higher-rate end of the spectrum. ICHRA as a complement adds parallel geographic complexity: a uniform reimbursement amount produces materially different coverage outcomes as benchmark premiums and carrier participation vary by rating area.

The result is market segmentation the level funded market has not solved. Employers increasingly conclude that the compliance overhead of multi-state level funded outweighs its cost advantage relative to a fully insured national carrier product that handles the complexity for them — pushing genuinely suitable employers toward a product that serves them less well on cost and transparency.