Quick answer
A self-funded (or self-insured) health plan is one where the employer pays employees’ medical claims itself instead of buying a policy from an insurer. Most large employers self-fund, and many small businesses use level-funded plans, a partly self-funded setup with fixed monthly payments. Self-funding can lower costs and give more control, but the employer takes on the risk of big claims, usually limited by stop-loss insurance.
Key takeaways
- 71% of covered workers were in self-funded plans in 2026, including 85% at firms with 200 or more workers.
- 37% of covered workers at firms with 10 to 199 workers were in level-funded plans.
- Self-funded plans follow federal law (ERISA), not state insurance mandates.
- Stop-loss insurance caps the employer’s losses from very large claims.
- Employees in self-funded plans still get key ACA protections, like free preventive care and appeal rights.
On this page
How self-funding works
The employer sets aside money to pay claims. A third-party administrator, often a well-known insurance company, handles the network, claims and customer service, so the ID card may look like any other insurance card. The employer buys stop-loss insurance to cover claims above a set amount, for one person or for the whole group.
Level-funded plans are a version for smaller employers. The business pays a fixed monthly amount that covers expected claims, administration and stop-loss. If claims come in lower than expected, the business may get money back.
Advantages
- Lower costs. No insurer profit margin on claims, and no state premium taxes.
- Flexibility. The employer designs the benefits, within federal rules, instead of taking a packaged plan.
- One set of rules. Employers in many states can offer the same plan everywhere, since state insurance mandates don’t apply.
- Data. The employer can see where its health dollars go and target programs, like prescription drug management.
- Cash flow. Money stays with the employer until claims are paid.
Disadvantages
- Risk. A few costly claims can drive up costs, especially for small businesses.
- Unpredictable budgets. Claims vary month to month.
- Stop-loss surprises. Stop-loss premiums can jump after a bad year.
- Legal duties. The employer is responsible for running the plan under ERISA.
What employees should know
- Your state’s mandates may not apply. State rules, like insulin copay caps or required coverage for certain treatments, apply to insured plans, not self-funded ones. See health insurance regulations by state.
- Federal protections still apply. Self-funded plans must cover preventive care at no cost, allow children to stay on until 26, cap yearly out-of-pocket costs, follow the No Surprises Act, and offer appeals and external review.
- Benefits can vary more. Extras like adult dental or orthodontics depend on what the employer chooses.
- Who to call. Complaints about a self-funded plan go to the U.S. Department of Labor, not your state insurance department. Your plan’s summary plan description says whether it’s self-funded.
Is self-funding right for your business?
It’s worth a look if you have a stable workforce, can handle some ups and downs in costs, and want more control over benefits. Very small businesses usually start with level-funded plans, which limit the risk. Get quotes from several administrators and stop-loss carriers, and compare them with fully insured plans from the best health insurance companies in your area.
Comparing individual coverage instead? See plans by ZIP code.
Frequently asked questions
How do I know if my health plan is self-funded?
Check your summary plan description or ask HR. The insurance company’s name on your card may just be the administrator.
Are self-funded plans worse for employees?
Not necessarily. Many large employers’ self-funded plans are generous. The main difference is that state insurance mandates don’t apply.
What is stop-loss insurance?
Coverage the employer buys to pay claims above a set amount, protecting the plan from very large bills.
Sources
This article is general information, not legal, tax or insurance advice. Talk with a benefits advisor before changing how your business funds its health plan. Last reviewed October 2026.