Self-Funded vs. Fully Insured Group Health: Which Is Right for You?
Fully insured group health plans are the standard for most California employers under 100 employees: the employer pays fixed monthly premiums to an insurance carrier, and the carrier assumes all risk for employee claims. Premiums are fixed for the 12-month policy year regardless of actual claims incurred. Simple, predictable, and appropriate for most small groups. The carrier makes a profit if claims are low; takes a loss if claims are high. The employer's maximum exposure is the fixed annual premium.
Self-funded (self-insured) group health plans work differently: the employer pays actual claims directly rather than fixed premiums. The employer contracts with a carrier (or TPA — Third Party Administrator) for administrative services only (ASO): network access, claims processing, member services. The employer retains the surplus in good claims years and absorbs higher costs in bad years. Stop-loss insurance (individual and aggregate) limits the employer's risk exposure.
Level-Funded Plans: The Middle Ground
Level-funded plans (also called partially self-funded) are the fastest-growing segment for small-to-mid CA employers (10–100 employees). The employer pays a fixed monthly amount — similar to a fully insured premium — but that amount is divided into: expected claims fund, stop-loss premium, and administration fees. If actual claims come in below projections at year end, the employer receives a refund of 50–100% of the surplus. If claims exceed projections, stop-loss coverage pays the excess. Level-funded plans from UHC All Savers, Aetna Funding Advantage, and Cigna Level Funded are available in California.
ERISA Preemption: A Key Advantage of Self-Funding
Self-funded plans are governed by ERISA (Employee Retirement Income Security Act) federal law, which preempts state insurance laws. This means self-funded plans are not subject to California's state-mandated benefits (infertility treatment, chiropractic, acupuncture, etc.) or California premium taxes. For large California employers, ERISA preemption can reduce benefit cost and complexity. This is a genuine advantage that partially offsets the administrative complexity of self-funding.
When to Consider Self-Funding
Self-funding generally makes sense at 75–100+ enrolled members when there's sufficient claims data for actuarial credibility, the employer has financial capacity to absorb claims volatility, and the workforce has favorable demographics (younger, healthier). Employers with good claims experience in a fully insured plan are the best self-funding candidates — they're paying margins to the carrier that they could retain. Work with a benefits consultant to model your current claims experience against self-funded projections before switching.