Which funding type is the right fit for small employers?
Explore the differences between a fully insured, self-funded and level funded plan — and why one option may be a better fit for small employers.
Small business owners have their hands full. Not only are they busy managing the day-to-day operations of their business — including keeping track of cash flow, hiring and training employees, marketing their business and more —they’re also responsible for choosing which health insurance and benefit options are right for their business and their employees.
When considering employer-sponsored group health insurance, small business owners have several funding options, each with its own set of advantages. Here's a breakdown to help you decide which might be right for your business:
| Fully insured | Self-funded | Level funded | |
| Cost to employer | Fixed monthly costs | Based on utilization and claims costs | Fixed monthly costs |
| Financial risk | Low | Higher | Low |
| Savings potential | Not applicable | Dependent on utilization and claims costs | Potential to receive a surplus refund if claims are lower than anticipated4 |
| Ability to customize plan | Little plan customization available | Very customizable | Some plan customization available |
Fully insured plans
These are traditional insurance plans where your business pays a fixed monthly premium to an insurance carrier. The carrier then assumes all the risk for employee health claims, which can be a huge benefit to small businesses, especially since costly conditions are rising among workforces around the country. The fully insured model offers predictability and simplicity, making it ideal for risk-averse businesses that prefer a hands-off approach, where the carrier assumes the risk. While fully insured plans are typically less customizable than their self-funded counterparts, at UnitedHealthcare, there are still customizations that employers can make.
A fully insured plan may be especially beneficial for small businesses that may not have the internal resources to manage health benefits, as the insurance carrier handles all administrative tasks and compliance requirements.
Self-funded plans
In a self-funded model, the plan sponsor assumes the financial risk of paying for plan participant health claims directly. While this arrangement may lead to significant cost savings if plan participants have fewer health claims, it may be a riskier arrangement if high-cost or unexpected claims come in, which is likely why only 18% of small firms with 3 -199 employees were enrolled in a self-funded plan in 2023.1
These plans, which are typically more popular among larger businesses, may require a more hands-on approach and greater management resources. With a self-funded health plan, plan sponsors also have more flexibility in designing benefits to meet the unique needs of their workforce, which may help contribute to better outcomes. Yet, small businesses may need to be prepared for potential high-cost claims — and have a strategy in place for managing these risks — such as purchasing stop-loss insurance, which protects employers when catastrophic claims come in.
Level funded plans
These plans represent a hybrid model where the risk is shared between the plan sponsor and the carrier. For instance, the plan sponsor would make fixed monthly payments, similar to a fully insured plan, but — if claims come in lower than expected — the health plan may receive a potential surplus refund.4 In fact, plan sponsors may pay 19% less on average under a UnitedHealthcare Level Funded plan compared to a fully insured plan.2
34%
of small firms (with 3 - 199 employees) were enrolled in a level funded plan in 20231
For many plan sponsors, this option provides a balance of predictability and potential cost savings, with less risk than a self-funded plan but more involvement than a fully insured plan, which may account for some of its growing popularity. In 2023, 34% of small firms with 3-199 employees were enrolled in level funded plans1 compared to just 7% in 2019.3
At a glance: Funding for small businesses
Each of these funding types offers different advantages depending on an employer’s specific needs, financial stability, workforce makeup and capacity to manage health benefits.
- Fully insured plans offer predictability and reduced administrative burden
- Self-funded plans offer more flexibility and potential savings but come with greater financial risk and require more hands-on administrative oversight and management
- Level funded plans blend elements of both, offering the predictability of fully insured plans and the potential savings of a self-funded plan
Employers should consider their unique circumstances and priorities when choosing the right funding type for their business.
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