When it comes to offering health benefits to your employees, one of the biggest decisions you'll face is whether to go with a self-funded or fully insured health plan.

Each option has its own set of rules, risks, and rewards. Choosing the right plan can impact your business’s financial health, compliance requirements, and employee satisfaction.

In this blog, we break down the differences to help you make an informed decision.

What Is a Fully Insured Health Plan?

A fully insured health plan is the traditional route most small businesses take. Here's how it works:

• You pay a fixed monthly premium to an insurance carrier.
• The insurance company takes on the financial risk and pays employee claims.
• Costs are predictable, but premiums may increase based on past claims.

Premium Costs Include:

• Estimated claims costs
• Administrative fees
• State premium taxes
• Insurance company profit

This type of plan is typically ideal for businesses with fewer than 100 employees.

What Is a Self-Funded Health Plan?

With a self-funded (or self-insured) plan, your business pays for employee health claims directly – either out of your general assets or from a dedicated fund.

• You assume more risk but gain greater control over your health plan.
• You may hire a Third-Party Administrator (TPA) to handle claims and compliance.
• Large companies often self-fund, but smaller businesses are starting to explore this option, too, especially with stop-loss insurance in place.

This model can result in significant savings if claims are low, but can become costly in years with high or unexpected claims.

Why Stop-Loss Insurance Matters

Stop-loss insurance protects self-funded employers from devastating medical costs.

Two Types of Stop-Loss Coverage:

1. Specific Stop-Loss Insurance – Covers claims for any individual exceeding a set threshold (e.g., $25,000).
2. Aggregate Stop-Loss Insurance – Covers total group claims if they go above a set annual limit (e.g., $500,000).

This makes self-funding more manageable and predictable for businesses of all sizes.

Legal Differences: ERISA vs. State Regulation

The type of plan you choose determines how your benefits are regulated.

• Self-funded plans are governed by ERISA (Employee Retirement Income Security Act of 1974), which preempts state laws.
• Fully insured plans must comply with state insurance laws, which can vary from state to state.

This distinction is crucial if your company operates in multiple states – ERISA provides a single regulatory standard, simplifying compliance for self-funded employers.

Costs: Premiums vs. Unbundled Fees

Here’s how the costs stack up:

Fully Insured Plan

• Fixed monthly premium
• Includes taxes and insurer profit
• Predictable but potentially higher long-term cost

Self-Funded Plan

• Variable costs based on claims
• Avoids premium taxes and insurer profit
• Potential for lower cost, higher risk

Self-funded plans offer transparency and cost control, but they require careful planning and management.

Nondiscrimination Rules

• Self-funded plans must follow nondiscrimination rules – benefits can't favor highly compensated employees.
• Fully insured plans have fewer restrictions, as long as they follow carrier guidelines.

Failing to comply with nondiscrimination rules can result in tax penalties for your employees.

Reporting Requirements

Both plan types come with reporting obligations:

• Self-funded plans must file IRS Form 5500, provide summary plan descriptions (SPDs), and update materials when changes are made.
• Fully insured plans also have certain IRS and state filing requirements, especially if employees contribute to premiums.

Outsourcing plan administration to a TPA can help ensure compliance.

Which Plan Is Right for Your Business?

Here’s a quick decision guide:

• Business Size: Under 100 employees – Best Fit: Fully Insured
• Business Size: 100-200 employees – Best Fit: Could go either way – evaluate risk tolerance
• Business Size: 200+ employees – Best Fit: Consider Self-Funded with Stop-Loss Coverage

Build a Better Benefits Strategy Today

Choosing between a self-funded and fully insured employee medical benefits plan is a strategic decision that impacts your bottom line and your team. Fully insured plans offer simplicity and predictability. Self-funded plans offer flexibility and potential savings but come with more responsibility.

If you’re unsure which option is best for your business, working with a trusted benefits advisor can help you weigh your options and make a confident, informed decision.

Need help evaluating your health benefits strategy? Contact OneDigital today to get a personalized plan that supports your people, and your business goals.