Self-Funded (Self-insured) Plan

A self-funded or self-insured health plan is one in which the employer directly pays employee health claims from its own assets : rather than paying a fixed premium to an insurance company. The employer bears the financial risk of claims instead of the insurer. Most self-funded employers hire a third-party administrator (TPA) or insurance company to process claims, and purchase stop-loss insurance to cap liability for catastrophic claims.

Fully insured: employer pays a fixed premium per employee to an insurance carrier, which then pays all claims and assumes all risk. Self-funded: employer pays actual claims as they occur plus administrative fees, with a stop-loss policy capping catastrophic exposure. Self-funded plans typically cost 5-15% less than fully insured for employers with healthy populations, provide more plan design flexibility, offer detailed claims data for wellness program targeting, and are exempt from most state insurance mandates.

Stop-loss insurance protects self-funded employers from catastrophic claims. Specific stop-loss covers individual claims above a per-member threshold (e.g., $100,000 per person per year) : the insurer pays amounts above that limit. Aggregate stop-loss covers total plan claims that exceed a defined percentage of expected annual costs (typically 125%) : protecting against a bad claims year across the entire population. Both types together provide the safety net that makes self-funding viable for mid-size employers.

Self-funded plans are most common among: large employers (1,000+ employees) who have the financial capacity to absorb claim volatility and the employee base to spread risk effectively; mid-size employers (200-500+) who purchase robust stop-loss coverage; and employers with relatively young, healthy workforces where claims costs are predictable and below fully insured premiums. Very small employers (under 100 employees) typically cannot self-fund due to catastrophic single-claim risk relative to their size.

Self-funded plans are governed primarily by ERISA (federal) rather than state insurance law : this federal preemption is a key advantage, as self-funded plans are exempt from state insurance mandates (e.g., state-mandated benefits not required by federal law). They must comply with: ACA requirements (preventive care coverage, dependent coverage to 26, no annual/lifetime limits for essential health benefits), HIPAA privacy and security rules (for protected health information), COBRA, and ERISA fiduciary standards.

Required infrastructure: Third-Party Administrator (TPA) or insurance carrier to process claims, a pharmacy benefits manager (PBM) for prescription drug claims, stop-loss insurance carrier, plan document and summary plan description (SPD), HIPAA privacy and security compliance infrastructure, claims data reporting capabilities, an appeals and grievance process, and HR staff or consultants knowledgeable in ERISA plan administration. The compliance burden is higher than fully insured plans : many employers work with benefits consultants for ongoing support.