A self-funded insurance plan is a health plan where a company pays for its employees’ medical costs using its own money instead of buying a health insurance policy from an insurance company.
Health insurance has become very expensive for employers. In 2025, the average cost of health coverage for a family of four reached $35,119. This is a big financial burden for many businesses. Because of these rising costs, many companies are now choosing self-funded insurance plans.
These plans follow federal rules under a law called ERISA. This law gives employers more freedom to design health benefits in a way that fits their company and employees better, instead of being limited by standard insurance plans.
In this blog, we will discuss what self-funded insurance is., who uses it, and how it differs from traditional (fully insured) coverage.
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What Is Self-Funded Insurance?
Self-funded insurance is a policy in which an employer uses its own finances to pay employees’ health claims as they happen. The employer usually hires a third-party administrator (TPA) to handle enrollment, ID cards, provider networks, and claims processing. To protect against very large bills, the employer buys stop-loss insurance. This is a separate policy. It reimburses the employer when claims exceed a chosen limit.
Self-funding is common among big sized and multi-national companies. It is growing among smaller firms through level-funded designs. These are a budgeted, more predictable version of self-funding.
How Does Self-Funded Insurance Work?
Employer sets a healthcare budget
The employer estimates next year’s medical spending. This includes claims, admin costs, and protection. Keeping in view the annual medical spending, the employer sets money aside to pay employee claims.
In a self-funded plan, the company pays for its employees’ medical costs itself. It does not pay a fixed premium to an insurance company. Instead, the company sets aside money. It knows people will go to the doctor, buy medicine, and order healthcare services. That is why it plans a health budget in advance. This budget is based on what it thinks those medical costs will be.
Plan is designed and managed by a TPA
Most employers do not manage a self-funded health plan by themselves. They hire a TPA (Third-Party Administrator) or ASO service from an insurance company.
These companies help run the plan. They handle daily tasks like giving employees health ID cards, managing doctor networks, and paying medical bills. They make sure the plan follows health laws.
Claims are paid directly by the employer
When employees get medical care, the TPA processes the claim. It uses the plan’s rules and allowed amounts to analyze the claim. It then takes funds from the employer’s account to pay healthcare providers.
In a self-funded plan, the employer acts like the insurance company and pays the medical bills. In a regular fully insured plan, the employer pays a premium to an insurance company. The insurance company then pays the medical bills. That is the main difference between the two plans.
Stop-loss insurance protects against big claims
To protect themselves from very high medical costs, employers who use self-funded plans buy stop-loss insurance. This is extra protection that has two parts:
- Specific stop-loss: protects the employer if one person has a very expensive medical bill.
- Aggregate stop-loss: protects the employer if all employee claims together become higher than expected in a year.
These protections are common in self-funded plans and help limit financial risk for employers.
Monthly reporting and cost control
In a self-funded plan, the employer is in charge of the health plan. Because of this, it gets regular reports. These reports show how much money is being spent on medical claims and how employees are using the plan. These reports do not include personal names when privacy is required.
This information helps the employer to find ways to reduce costs over time. For example, they can improve the benefits. They can choose better doctor networks. They can manage pharmacy costs.
Self-funded plans follow federal rules under a law called ERISA. ERISA sets standards for employer health plans.
Self-Funded vs Fully Insured: What’s the Difference?
There are two main ways employers provide health insurance. These are self-funded plans and fully insured plans. Both offer health benefits to employees. But, they work in very different ways. They affect cost, risk, and control.
| Feature | Self-Funded Plan | Fully Insured Plan |
| Cost | Employer pays medical bills as they happen; costs may go up or down each month | Employer pays a fixed monthly premium to an insurance company |
| Risk | Employer takes financial risk for claims but uses stop-loss insurance for protection | Insurance company takes the risk and pays all covered claims |
| Control | Employer has more control over plan design and data | Insurance company controls plan rules and claims information |
Self-funded plans offer more flexibility and potential savings. However, they also come with higher responsibility. Fully insured plans are easier to manage. But, they usually cost more over time due to insurance company fees and profit margins.
Types of Self-Funded Plan
There are four main types of self-funded plan. Let’s discuss them in detail!
Traditional Self-Funded Plan
In a traditional self-funded plan, the employer pays for employees’ medical claims directly. They use company funds instead of paying monthly premiums.
The employer takes on the financial risk of claims. They usually buy stop-loss insurance. This protects against very high costs. This type of plan is common among medium and large employers for long-term cost control and benefit flexibility.
Level-Funded Plan
A level-funded plan is a simpler version of self-funding. It is designed for small and mid-sized businesses. The employer pays a fixed monthly amount to cover expected claims, administration fees, and stop-loss protection.
If total claims are lower than expected, the employer may receive a refund. If claims are higher, stop-loss insurance helps cover the extra cost. This makes it easier for smaller companies to manage risk.
Group Captive Self-Funded Plan
In a group captive arrangement, multiple employers join together to share claim risks. They form a captive insurance group. They collectively purchase stop-loss coverage.
Each employer runs its own health plan. But, they share a portion of claim risk with the other members. This structure reduces volatility and provides more stable health costs.
Partial Self-Funded Plan
A partial self-funded plan allows an employer to self-fund certain parts of healthcare benefits while keeping other parts fully insured.
For example, an employer may self-fund medical coverage. But they may choose traditional insurance for dental or vision benefits.
This approach offers flexibility. It allows employers to manage risk gradually. They do not have to shift to full self-funding immediately.
Components of a Self-Funded Plan
TPA (Third-Party Administrator)
A TPA is a company that helps the employer run the health plan. It handles everyday work like adding employees to the plan, giving them health ID cards, and paying medical bills. It also answers questions from employees. The TPA does not pay any medical costs. It only manages the plan for the employer.
PBM (Pharmacy Benefit Manager)
A PBM helps manage the medicine part of a health plan. It works with drug companies and pharmacies to get lower prices on medicines. It also decides which medicines are covered by the plan. The PBM helps the employer save money on prescription drugs, which are often very expensive.
Provider Network (PPO or Direct Contracts)
In a self-funded plan, employees need a list of doctors and hospitals that they can visit. This list is called a provider network. The employer gets access to this network through the TPA. The doctors and hospitals in the network agree to give medical services at lower prices. This helps the employer save money. It makes healthcare more affordable for employees.
Stop-Loss Insurance Provider
The stop-loss carrier protects the employer from very large or unexpected medical bills. Specific stop-loss protects against high claims for one person. Aggregate stop-loss limits the total claim cost for the entire group. Stop-loss is a key safety tool. It makes self-funding financially safe and predictable.
Claims Fund Account
This is the employer’s dedicated account used to pay employee medical claims. The TPA accesses this fund. It pays approved claims on behalf of the employer. The amount placed into the claims fund is based on expected health costs and claim history.
How to Set Up a Self-Funded Plan (Step-by-Step Guide)
Feasibility Study
This step is about checking if a self-funded health plan is right for your company. You review your company’s size, how much money you have available, and past medical costs for employees.
It’s also important to see how much financial risk your business can handle if medical bills are higher than expected.
Before making decisions about self-funded insurance, company leaders must be ready to manage the plan and follow federal rules under ERISA, which govern self-funded insurance plans.
Build Plan Design
You decide what your health plan will include and how it will work. You choose what medical services are covered, how much employees will pay through deductibles or copays, and which doctors or hospitals will be in your network.
All these details are written in an official plan document. You also prepare simple employee guides, called SPD and SBC, to clearly explain the plan and meet legal requirements under ERISA.
Select Stop-Loss Coverage
Employee medical bills which the employer pays can sometimes be very high. The employer buys stop-loss insurance to stay protected. This coverage helps limit losses.
Specific stop-loss protects if one person has a very large medical bill. Aggregate stop-loss protects if the total cost for all employees in a year is too high.
The employer chooses coverage limits based on how much risk the company can handle. They use state or national guidelines as a reference.
Hire TPA/PBM
Running a self-funded plan requires help from experts. A Third-Party Administrator (TPA) manages daily tasks like enrolling employees, giving ID cards, handling claims and preparing reports.
A Pharmacy Benefit Manager (PBM) works with drug companies and pharmacies to control medicine costs. The employer still pays for the claims. But, the TPA and PBM make sure everything runs smoothly and correctly.
Plan Funding Strategy
In this step, the employer decides how much money to put into the claims fund every month. This fund is used to pay employee medical bills, administrative costs, and stop-loss insurance.
The employer also keeps some extra money for IBNR, which means “claims that have happened but have not been reported yet.”
The payment schedule should match the company’s cash flow so that the TPA always has enough money to pay medical bills on time.
Launch and Communication Plan
Once everything is ready, the employer signs contracts with vendors. The employer tests data systems and picks a start date for the plan. HR staff should be trained so they can explain the plan to employees.
When the plan is launched, information should be shared. This includes how to find a doctor, how to use the pharmacy, and how to file a claim.
After the plan starts, the employer should review reports every month or quarter. This tracks costs. It helps make changes if needed to improve the plan.
FAQs About Self-Funded Insurance
Is self-funded the same as level-funded?
No. A self-funded plan pays actual medical claims as they happen. A level-funded plan has a fixed monthly payment. This payment covers expected claims and insurance protection. This makes costs more predictable for small employers.
What happens if claims are higher than expected?
If claims cost more than planned, the employer pays the extra amount. However, stop-loss insurance helps cover very large bills. It also covers unexpected medical bills. This ensures the company is not hurt financially.
Do employees pay more in self-funded plans?
Not always. Employee costs depend on the employer. These costs include deductibles or copays. The employer designs the plan. In some cases, self-funded plans can offer lower costs. They can also offer better benefits. This is because there is no insurance company profit added.
Is self-funded insurance legal in all states?
Yes. Self-funded plans are legal everywhere in the U.S. They are regulated by federal law (ERISA). They are not regulated by state insurance laws. This gives employers more freedom in designing benefits.
Can small businesses self fund insurance?
Yes, but small businesses usually choose level-funded plans. This makes monthly costs easier to manage. Stop-loss insurance also helps protect them from big claims.
Does ERISA protect self-funded plans?
Yes. ERISA sets the rules for self-funded employer health plans. It protects employee benefits. It requires clear plan information. It ensures fair handling of claims and appeals.
