Level Funded vs. Fully Insured: Which Plan Works Best for Small Businesses?

Have you ever wondered how small businesses can save on health insurance while still offering good coverage for their employees? Well, if you're a business owner, you might have come across two main types of health plans: level funded vs. fully insured. But which one is right for your company? Let’s take a closer look at each option and figure out which is best for you.

What is a Level Funded Plan?

A level funded plan is a health insurance option where the business owner pays a fixed monthly amount to a health insurance company. This monthly amount is designed to cover the health care costs of the employees. The employer also sets aside money in a reserve fund to cover any unexpected health costs that may arise throughout the year.

Think of it like a balance between a fully insured plan and a self-insured plan. The monthly cost stays the same each month, which makes budgeting easier for small businesses. However, if your employees don’t use a lot of healthcare services, the employer could potentially get a refund at the end of the year.

What is a Fully Insured Plan?

A fully insured plan, on the other hand, is a more traditional type of health insurance. In this setup, the employer pays a fixed monthly premium to an insurance company, and the insurance company takes on all the risk. That means the insurance company is responsible for paying the claims for any medical costs your employees incur.

This type of plan is easy for small businesses to understand because it’s simple: pay the premium, and the insurance company covers the rest. However, fully insured plans can be more expensive since the insurance company assumes all the risk.

How Do the Two Plans Compare?

Let’s break it down in a way that makes it easy to compare level funded vs. fully insured plans.

Benefits of Level Funded Plans 

• Predictable Costs: Since the monthly amount stays the same, it’s easier for business owners to budget and plan their finances.

• Refunds: If employees don't use much healthcare, the employer might get a refund at the end of the year.

• Cost Control: Employers have more control over the plan design and the level of coverage, which can lead to cost savings.

Benefits of Fully Insured Plans 

• Simplicity: These plans are straightforward. The employer simply pays a fixed premium each month, and the insurance company handles the rest.

• No Risk: The employer doesn’t have to worry about unexpected medical claims because the insurance company covers all the costs.

• Consistent Coverage: Employees have access to a broad network of doctors and hospitals, making it easier for them to get care. 

Which Option is Best for Small Businesses?

Selecting between level funded vs. fully insured plans really depends on the specific needs of your business. Here are some things to consider:

• Budget: If you want predictable costs and a chance for a refund, a level funded plan might be the best fit. It’s a good choice for businesses that are relatively healthy and don't expect high medical claims.
• Simplicity: If you prefer a simple, hands-off approach where the insurance company handles everything, a fully insured plan could be the better option. While it may be more expensive, it’s easy to understand and manage.
• Risk Tolerance: If your business is willing to take on a little more risk in exchange for the potential of saving money, level funded could be the way to go. However, if you want to avoid risk altogether, then a fully insured plan is the safer bet.

Examples

Let's say you run a small company with 10 employees. In a fully insured plan, you’ll pay a set premium each month, say $1,000 per employee. That means you’re paying $10,000 per month, no matter how much healthcare your employees actually use.

Now, with a level funded plan, you’ll also pay a fixed monthly amount. However, let’s say you only end up using $80,000 in claims that year, while you had budgeted $100,000 for claims. In this case, you could get a refund of the difference at the end of the year.

Real Stats on Costs

To give you a clearer picture, let’s look at the cost difference. According to a 2023 survey by National Association of Health Underwriters, businesses that use level funded plans can save up to 20% annually on health insurance compared to fully insured plans. However, this depends on how much employees use healthcare services.

Things to Keep in Mind

• Small Businesses and Health Insurance: Health insurance can be one of the biggest expenses for a small business, so it’s important to choose a plan that makes sense for both your budget and your employees.
• The Claims Factor: The health of your employees matters. If your team is healthy, a level funded plan could result in savings. But if there are a lot of medical claims, a fully insured plan might be less stressful, even if it's more expensive.

Conclusion

Level funded vs. fully insured? If you want more control over costs and are open to some risk, a level funded plan could be the right choice. But if you prefer simplicity and want to avoid risk, a fully insured plan might be the way to go.

It all depends on what works best for your business’s budget, risk tolerance, and employee needs. Whatever you choose, remember that the goal is to provide your employees with good healthcare while keeping your business financially healthy.

Want to learn more about health insurance options for your small business? Reach out to a benefits advisor to get advice tailored to your situation!