For most employers, health benefits rank as the second largest business expense after payroll. The decisions around how to structure and fund that coverage carry real consequences: for budget predictability, for HR capacity, and for the employees who depend on that coverage year after year.
The benefits landscape has also changed significantly over the last decade. Funding models that were once the exclusive domain of large, self-insured corporations are now accessible to mid-size and smaller employers. New defined contribution tools have given businesses more flexibility in how they deliver coverage. And as premiums continue to climb, more employers are asking whether the plan they’ve been renewing on autopilot is actually the right fit.
This guide is for HR professionals, business owners, and benefits decision-makers who want a clear, practical overview of what’s available. We’ll walk through the four primary approaches to funding group health coverage: fully insured plans, self-funded plans, level-funded hybrid arrangements, and defined contribution alternatives like HRAs. For each, we’ll explain how it works, who it’s built for, and where it tends to create friction.
If you’re heading into a renewal, building a benefits strategy from scratch, or advising clients on their options, this is your starting point.
What are group health plans and why does funding structure matter?
A group health plan is any employer-sponsored arrangement that provides health coverage to employees and their dependents. According to KFF’s 2025 Employer Health Benefits Survey, employer-sponsored insurance currently covers 154 million Americans under age 65, making it the dominant coverage pathway in the country.¹
But “group health plan” isn’t a single thing. It’s an umbrella term covering a range of structures, and the funding mechanism underneath shapes nearly everything: your cost exposure, your flexibility, your administrative workload, and your ability to adapt when circumstances change.
Employers with 50 or more full-time employees are required under the ACA to offer coverage that meets minimum value and affordability standards. For those employers, the question isn’t whether to offer coverage, it’s how to structure it most effectively. For smaller employers, offering coverage is a competitive decision with real stakes. According to SHRM’s 2025
Employee Benefits Survey, 88% of employers rate health-related benefits as either extremely or very important to their workforce, making it the top-ranked benefits category for the year.²
Getting the funding strategy right matters. Here’s what your options look like
→ Learn more about group health insurance for beginners
Fully insured plans: the traditional standard
Fully insured plans have been the default employer health benefit model for decades and for good reason. They’re straightforward to set up, administratively simple to maintain, and widely understood by employees and HR teams alike.
In a fully insured arrangement, the employer pays a fixed monthly premium to a commercial insurance carrier. The carrier assumes all financial risk for employee claims and handles the administrative work: claims processing, network management, and regulatory compliance. Premiums are calculated based on employee headcount, workforce demographics, and the benefit levels selected.
What works well
The predictability is the primary draw. Employers know their monthly cost regardless of what the workforce actually spends on care that year. For smaller businesses without dedicated benefits staff, offloading administration to the carrier is a meaningful advantage. And because fully insured plans are the most familiar model, they tend to be easier to communicate to employees during open enrollment.
Where it creates friction
Predictability has a price. Premiums include the carrier’s overhead and profit margin, which means employers pay for that stability even in years when claims run low. There’s no mechanism to share in the savings.
Renewal increases are a persistent challenge. Average annual premiums for family coverage reached $26,993 in 2025, a 6% increase over the prior year, and early forecasts for 2026 point to further increases.¹ Employers on fully insured plans have limited leverage in those negotiations and limited ability to customize plan design. Coverage options are largely determined by what the carrier offers, which doesn’t always align with the specific needs of a given workforce.
Fully insured plans work best for smaller employers who prioritize simplicity and cost predictability over flexibility, and who don’t have the financial reserves or administrative capacity to take on more risk.
Self-funded plans: more control, more responsibility
Self-funded plans represent a fundamentally different approach. Rather than paying fixed premiums to a carrier, the employer sets aside funds and pays employee health claims directly. Most self-funded employers partner with a third-party administrator (TPA) to handle claims processing, network access, and compliance management.
This model has become the dominant structure among larger employers. 67% of covered workers are enrolled in self-funded plans overall, including 80% of workers at larger firms.¹
What works well
The primary appeal is cost efficiency. When employee claims run lower than projected, the employer keeps the difference rather than subsidizing a carrier’s profit margin. Self-funded plans also give employers direct access to claims data, which creates meaningful leverage in plan design decisions and renewal negotiations.
Flexibility is another significant advantage. Employers can customize deductibles, copays, covered services, and network arrangements to fit their specific workforce rather than accepting a preset product. Self-funded plans are also largely exempt from state insurance regulations under ERISA, which can reduce mandatory benefit requirements and give employers more control over plan design.
Where it creates friction
Financial exposure is the defining risk. If claims spike unexpectedly, the employer absorbs the cost. Most self-funded plans purchase stop-loss insurance to cap liability for catastrophic claims, which adds to overall plan costs but provides an important safety net.
Administrative complexity is also higher, even with a TPA in place. Compliance with federal requirements including ERISA, HIPAA, and applicable ACA provisions requires ongoing attention. Self-funding generally works best for larger employers with stable, predictable workforces and sufficient cash reserves to manage claim variability without financial disruption.
→Learn more about the difference between fully insured and self-funded health plans
Level-funded plans: a hybrid approach
Level-funded plans have gained significant traction among small and mid-sized employers who want more flexibility than a fully insured plan provides but aren’t ready to take on the full financial risk of self-funding. They occupy the middle ground between the two models, and for many businesses they represent the most practical starting point for moving away from traditional group coverage.
Here’s how it works: the employer pays a fixed monthly amount divided into three components: a claims fund, administrative fees, and stop-loss insurance. At the end of the plan year, if actual claims were lower than the funded amount, the employer receives a refund of the surplus. If claims exceed the funded amount, the stop-loss coverage absorbs the overage.
The model is gaining ground. 37% of covered workers at small firms are now enrolled in level-funded arrangements, similar to the prior year and a meaningful indicator of how far this model has moved into the mainstream.¹
What works well
Level funding offers the cost predictability of a fully insured plan with the potential upside of self-funding. Employers also gain access to actual claims data, something fully insured carriers typically don’t provide, which creates better visibility into workforce health trends and stronger footing in renewal conversations. Plan customization options are broader than in traditional fully insured arrangements.
Where it creates friction
Level-funded plans are more complex to administer than fully insured plans and require careful vetting of both the TPA and the stop-loss carrier. The refund potential is real but not guaranteed, and some products bundle fees in ways that reduce cost transparency. Employers should review plan documents closely to understand how the claims fund, stop-loss attachment points, and refund provisions work before committing.
Financial risk is also worth understanding clearly. While stop-loss insurance protects the employer in year one, a high-claims year doesn’t go unnoticed at renewal. Stop-loss carriers reprice based on claims experience, which means a bad year can translate into substantially higher premiums the following year. The cost predictability that makes level funding attractive can erode quickly if the underlying claims data trends in the wrong direction.
Alternatives to traditional group health plans
For employers who want to move away from the group plan model entirely, or who need a solution that works for a workforce traditional plans weren’t designed to serve, two alternatives are worth serious consideration: unbundled self-funded plans and health reimbursement arrangements.
Unbundled self-funded plans
In a traditional self-funded setup, employers typically work with a single carrier that bundles the TPA, network access, and stop-loss insurance together. Unbundling means sourcing each component separately: a standalone TPA, a leased provider network, a pharmacy benefit manager, and stop-loss coverage purchased independently.
The potential benefit is meaningful cost reduction through competitive sourcing, along with greater transparency into exactly what you’re paying for and why. The trade-off is a higher administrative lift and the need for either a sophisticated internal benefits team or an experienced broker to manage the moving pieces effectively.
Health reimbursement arrangements (HRAs)
HRAs take a different approach altogether. Rather than selecting a group plan for the entire workforce, the employer sets a fixed monthly allowance and reimburses employees tax-free for individual health insurance premiums and eligible out-of-pocket medical expenses. Employees choose their own individual plans based on their own doctors, prescriptions, and coverage preferences.
The two most relevant HRA types for most employers are the Individual Coverage HRA (ICHRA) and the Qualified Small Employer HRA (QSEHRA). The ICHRA has no contribution limits and allows employers to set different reimbursement amounts for different employee classes, including full-time and part-time employees, salaried and hourly workers, and employees in different geographic locations. This makes it particularly well-suited for employers with distributed workforces, remote employees, or mixed employment arrangements that traditional group plans struggle to accommodate. The QSEHRA is designed for businesses with fewer than 50 employees and caps annual reimbursements at IRS-set limits.
HRAs solve several of the most persistent pain points of traditional group coverage. There are no participation rate requirements to meet. There are no renewal increases to absorb. Geographic coverage gaps for remote or multi-state employees are eliminated because each employee shops for coverage in their own market. And the employer controls costs through the defined contribution rather than taking on open-ended premium risk.
→Learn more about health reimbursement arrangements
Choosing the right funding strategy
No single approach works for every employer. The right fit depends on a combination of factors specific to your business.
Company size and financial reserves matter significantly. Fully insured and level-funded plans make more sense for smaller employers who can’t absorb meaningful claim variability. Larger organizations with stable cash flow are better positioned to capture the savings potential of self-funding or unbundled arrangements.
Workforce composition is equally important. Remote employees, part-time workers, and geographically dispersed teams often create coverage gaps and participation challenges with traditional group plans. HRAs were specifically designed to address those situations.
Administrative capacity frequently shapes what’s realistic. Self-funded and unbundled plans require either a capable in-house benefits team or a strong TPA relationship. Employers with lean HR functions are often better served by fully insured, level-funded, or HRA-based approaches that limit day-to-day management requirements.
Risk tolerance is the final filter. Fully insured plans transfer all claims risk to the carrier. Self-funded plans keep it with the employer. Level-funded and stop-loss-backed arrangements split the difference. HRAs eliminate claims risk entirely by converting health benefits into a fixed defined contribution.
The most costly mistake most employers make isn’t choosing the wrong plan type. It’s never asking the question in the first place. If you haven’t modeled your options against your actual workforce data and claims history recently, a renewal is the right moment to start.
Ready to find the right fit for your business?
Take Command specializes in helping employers of all sizes evaluate their options and build benefits strategies that work for their workforce and their budget. Whether you’re considering an HRA for the first time or looking to move away from a group plan that no longer fits, our team can walk you through the numbers and help you make a confident decision.
Talk to a Take Command expert today.
Frequently asked questions about group health plan funding strategies
What is the most common type of group health plan?
Fully insured plans remain the most familiar model, particularly among smaller employers. However, self-funded plans have become the dominant structure by enrollment: according to KFF’s 2025 Employer Health Benefits Survey, 67% of covered workers are now enrolled in self-funded arrangements. Among larger employers, that number climbs to 80%.
Can small businesses use self-funded or level-funded plans?
Yes. While self-funded plans have historically been associated with large employers, level-funded plans have made this model increasingly accessible to smaller businesses. KFF’s 2025 survey found that 37% of covered workers at small firms are already enrolled in level-funded arrangements. The key considerations for small employers are cash flow stability, risk tolerance, and whether they have the administrative support to manage the additional complexity.
What is the difference between an ICHRA and a QSEHRA?
Both are HRA types that allow employers to reimburse employees tax-free for individual health insurance premiums and eligible medical expenses, but they differ in scope. The ICHRA is available to employers of any size, has no contribution limits, and allows different reimbursement amounts for different employee classes. The QSEHRA is limited to employers with fewer than 50 employees and caps annual reimbursements at IRS-set limits. Employers who start with a QSEHRA can transition to an ICHRA if they grow beyond 50 employees or need more flexibility in plan design.
What happens to employees’ health coverage if we switch from a group plan to an HRA?
Employees retain their own individual coverage, which they selected and own independently. When an employer moves from a group plan to an HRA, employees shop for individual plans on the ACA marketplace or elsewhere during open enrollment. Because individual coverage is portable, employees keep their plan regardless of employment status, which also eliminates COBRA administration for the employer.
How do we know which funding strategy is right for our business?
The right fit depends on your company’s size, financial reserves, workforce composition, administrative capacity, and risk tolerance. Fully insured plans offer simplicity and predictability. Self-funded and level-funded plans offer potential cost savings and greater flexibility. HRAs offer defined contribution cost control and maximum employee choice. The best starting point is modeling your current costs and claims history against alternative structures, ideally with a benefits advisor or HRA administrator who can run the numbers specific to your workforce.
References
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KFF. “2025 Employer Health Benefits Survey.” kff.org/health-costs/2025-employer-health-benefits-survey/
- SHRM. “2025 Employee Benefits Survey.” shrm.org/topics-tools/research/employee-benefits-survey
