Level-funded or fully insured: which health plan fits an Alabama employer?

The terms, in one line each

• Fully insured plan: the employer buys a group health insurance policy, pays a fixed premium set at the start of the policy term, and the carrier pays the claims and carries the risk.
• Self-funded plan: the employer pays employees’ health claims from its own funds, usually through a third-party administrator (TPA), a company that processes claims for the plan.
• Level-funded plan: a self-funded plan packaged with stop-loss insurance. KFF defines it as an arrangement where “the employer makes a set payment each month to an insurer or third party administrator which funds a reserve account for claims, administrative costs, and premiums for stop-loss coverage,” and where surplus claims payments may be refunded at the end of the contract.
• Stop-loss insurance: a policy that reimburses the employer for eligible claims above a set level, under the policy’s terms. The Department of Labor says stop-loss “does not usually guarantee the payment of benefits to plan participants. More often, it only insures the employer against losses.”
• Attachment point: the claims level above which stop-loss starts reimbursing the employer, set per person (specific) or for the whole group over a period (aggregate).
• Underwriting: an insurer’s review of a group’s health and claims history to decide whether to offer coverage and at what price.

Side by side

Factor	Fully insured	Level-funded
Who owes covered claims	The carrier, under the policy	The employer, at every dollar level
Role of stop-loss	No stop-loss layer	Reimburses the employer for eligible claims above the attachment points, subject to exclusions, lasers, and timing terms
Monthly cost	Fixed premium	Fixed payment covering expected claims, administration, and the stop-loss premium
When claims run low	Premium stays as set for the policy term	Surplus may be refunded, on the contract’s terms
Pricing	ACA-compliant small group, excluding grandfathered and transitional policies: individual or family coverage, rating area, age, and tobacco use only. Large group: outside those federal rating limits	Priced on the group’s health status and claims
Required benefits	ACA-compliant small group, excluding grandfathered and transitional policies: essential health benefits package. Any insured plan: state insurance law, including benefit mandates	ERISA-covered single-employer plan: exempt from state mandates; federal group-plan protections still apply
Main regulator	State insurance law plus federal law	ERISA for the plan; state insurance law for the stop-loss policy
Renewal	ACA-compliant small group: rerated under ACA rating rules; grandfathered and transitional policies can differ	Stop-loss re-underwritten each year; price, terms, or renewal itself can change
Claims after the plan ends	Covered on an occurrence basis by the group policy	The employer stays responsible; stop-loss reimburses late claims only within its run-out terms
Alabama premium tax	Insurer pays on taxable health premiums, subject to statutory exemptions	The plan: exempt under ERISA (KFF). The stop-loss policy: treatment unresolved, ask counsel
PCORI fee	Carrier files and pays	Employer, as plan sponsor, files Form 720 and pays

Where the regulation differs

State insurance law and ERISA

• ERISA section 514 supersedes state laws that relate to covered employee benefit plans, preserves state laws that regulate insurance, and bars states from treating a benefit plan as an insurance company.
• ERISA excludes some plans entirely, including governmental plans and church plans that have made no election under Internal Revenue Code section 410(d). Those plans follow different rules.
• For an ERISA-covered, single-employer plan that self-insures, the Department of Labor explains that private-sector plans “are not subject to State health insurance laws, including coverage laws, rating policies, and certain other State consumer protections applicable to health insurance.” KFF lists the exemption as covering “reserve requirements, mandated benefits, premium taxes, and some consumer protection regulations.”
• Multiple employer welfare arrangements (MEWAs), which ERISA defines generally as arrangements offering benefits to the employees of two or more employers, are treated differently. Under section 514(b)(6), states may apply reserve and contribution standards to fully insured MEWAs, and may apply insurance law to other MEWAs to the extent consistent with ERISA.
• The stop-loss policy itself is an insurance product that states can regulate. In Technical Release 2014-01, the Department of Labor said a state law prohibiting insurers from issuing stop-loss contracts with attachment points below specified levels would not, in its view, be preempted by ERISA.

ACA rules

• Who counts as small. Federal rules define a small employer as one with an average of 1 to 50 employees in the preceding calendar year, and a state may elect to raise that to 100.
• Rating. In ACA-compliant small-group coverage, a carrier’s rates may vary only by individual or family coverage, rating area, age (no more than 3 to 1 for adults), and tobacco use (no more than 1.5 to 1).
• Benefits. A carrier offering ACA-compliant small-group coverage must include the essential health benefits package defined in section 1302(a) of the Affordable Care Act. The rating and benefits requirements both cover individual and small-group coverage; large-group insured plans fall outside them.
• Grandfathered and transitional coverage. A plan that has covered someone continuously since March 23, 2010, and kept its grandfathered status, is exempt from the rating and essential health benefits provisions above. So is a transitional policy still in force under CMS’s extended non-enforcement policy, where a state allows it.
• What reaches self-funded plans. The Department of Labor notes that self-funded plans skip some issuer-only ACA requirements and remain subject to group market protections, including the bar on pre-existing condition exclusions. A group health plan may not set lifetime or annual dollar limits on essential health benefits, and a plan that offers dependent coverage of children must make it available until age 26.
• The practical gap. KFF observes that level-funded plans “use health status in rating and underwriting.”

Taxes and filings

• Alabama premium tax. Under the Code of Alabama, Section 27-4A-3, and the Alabama Department of Insurance tax schedule, insurers pay tax on taxable health premiums: 1.6 percent generally, and one-half percent for employer-sponsored plans for groups with less than 50 insured participants. Employer-sponsored plans for governmental employees are exempt, along with certain government-program supplement policies.
• The plan and the stop-loss policy, separately. KFF notes that ERISA exempts private employers’ self-funded plans from state premium taxes. The stop-loss policy is a separate insurance purchase, and how Alabama’s premium tax applies to it is a question for counsel.
• PCORI fee. The Patient-Centered Outcomes Research Trust Fund fee falls on carriers for insured policies and on plan sponsors of self-insured plans. Per the IRS, it equals the average number of covered lives times $3.84 for plan years ending after September 30, 2025 and before October 1, 2026. It is paid on Form 720, due July 31 of the year after the plan year ends, and dependents count as covered lives.

The real risks of level funding

An older NAIC white paper reviewed a sample of stop-loss policies and described provisions found in some of them. Treat its findings as provisions to check in your own contract.

1. Renewal follows your claims. The policies it describes were written with one-year terms, so price and contract terms “can vary from year to year, due to re-underwriting.” Check whether your insurer can decline to renew or cancel mid-term.
2. Underwriting looks at your people. A stop-loss insurer examines the group’s claims history and “may offer coverage at an increased rate or refuse to offer coverage.” It may also set a higher attachment point for specific individuals with high-cost conditions, called a “laser.”
3. Exclusions leave claims with you. Some policies excluded certain claims, such as those of employees “not actively at work” when the policy began. The paper notes that an employer plan can remain responsible for paying covered claims its stop-loss policy excludes.
4. Claims can outlive the contract. Unless the policy extends coverage, stop-loss reimburses only claims incurred and paid in the same policy year. Some run-out periods were as short as three months, while some claims take as long as 18 months to resolve.
5. Costs can move mid-year. The paper found stop-loss premiums “generally subject to change, in some cases, retroactively,” and a risk of extra claim-fund contributions when claims exceed the fund balance.
6. Surplus depends on the fine print. KFF’s definition says surplus “may be refunded.” The paper also cautioned that financing costs can be built into the premium, and possibly into provisions letting the insurer keep the “float” on a positive claim-fund balance.

Before signing, get written answers to these:

• How is surplus calculated, when is it paid, and what share comes back?
• Which claims, conditions, or people does the stop-loss policy exclude or laser?
• Who pays claims incurred before the end date and submitted after it?
• Can the stop-loss premium change during the plan year?
• What could we owe beyond the monthly payments, and is any of it uncapped?

Who level funding tends to fit

• Lower-risk groups. Because self-funded pricing can reflect an employer’s own risk, the NAIC paper explains it is assumed that “self-funded plans will be attractive to low-risk groups,” while “high-risk groups are expected to see better rates in the modified community-rated environment of a fully insured plan.”
• Employers with cash reserves. The paper cautions that a self-funded plan’s cash flow “cannot be budgeted with confidence, especially by small employers.”

Level funding is common among smaller firms. In the KFF 2025 survey, 37 percent of covered workers at firms with 10 to 199 workers were in a level-funded plan, and 37 percent of those firms offering health benefits offered one. KFF also notes that respondents can be confused about whether these plans are self-funded or insured.

What Alabama’s market concentration means

In the AMA’s 2025 update of its health insurance competition study, Alabama ranks first among the ten states with the least competitive commercial health insurance markets. The full report bases that ranking on market concentration in the combined PPO, HMO, POS, and exchange market.

AMA measure for Alabama (2024 data)	Figure
Blue Cross and Blue Shield of Alabama, share of combined commercial market	84%
Second-largest insurer (UnitedHealth Group)	6%
Statewide concentration index (HHI), combined market	7,193
BCBS of Alabama, share of PPO market (Jan. 1, 2024)	92%

The combined measure uses Jan. 1, 2024 enrollment for PPO, HMO, and POS plans and July 1, 2024 data for exchange plans. Under the federal merger guidelines the AMA applies, a market with an HHI (Herfindahl-Hirschman Index, a standard concentration score) above 1,800 is highly concentrated. The AMA’s figures count enrollment in both fully insured and self-insured plans, so the 84 percent describes the AMA’s measured combined commercial market, fully insured and self-insured enrollment together.

What that means when you compare plans:

• Compare arrangements as well as carriers. A fully insured quote and a level-funded quote are two different pricing decisions, so ask for both from every carrier willing to quote your group.
• Check networks early. When one carrier holds most of the state’s enrollment, confirm that each quote’s network includes the doctors and hospitals your employees actually use.
• Compare annual totals, counting claims funding once. Set the fully insured annual premium against the level-funded plan’s annual payments plus any additional funding the contract can require, such as claim-fund top-ups. The monthly payments already fund expected claims. Then list the exposures that can sit outside any cap, such as lasered amounts, claims the policy excludes, and claims paid after the run-out period, because some contracts set no overall maximum for them.

How My Advisor helps

We broker across carriers and across fully insured, level-funded, and self-funded arrangements, so the recommendation follows your census and your claims history, and we show you the math behind it. Our renewal process includes contract review, claims analysis, and actuarial reporting and consultation where the numbers need it. The compliance questions that ride along with plan design, from ERISA documents to ACA reporting, live with our compliance practice, backed by legal experts on retainer for our clients.