Self-Funded Health Plan

A self-funded health plan is a group health arrangement in which the employer pays its employees' medical claims from company funds instead of paying a fixed premium to an insurance carrier. The employer carries the claims risk, so monthly costs rise and fall with how much care employees actually use.

Most self-funded employers hire an outside administrator to run the plan day to day, often under an administrative services only arrangement. Many also buy stop-loss coverage so that a single catastrophic claim cannot threaten the business.

How Does a Self-Funded Health Plan Work?

Each month the employer funds a claims account and pays the administrator's fees. As employees visit doctors and fill prescriptions, the administrator processes each claim under the plan document and the employer reimburses providers from that account.

Because the employer pays for what employees really use, a quiet year can cost less than an insured premium would have. A year with several large claims can cost far more, which is why budgeting, claims reporting and risk limits matter so much.

The employer also keeps responsibility for the plan itself. That means adopting a plan document, choosing the benefit design and network, and meeting the federal rules that apply to group health plans, even though a vendor handles the paperwork.

Who Uses Self-Funded Plans?

Self-funding is the norm at large employers. In KFF's 2025 survey, 67% of covered workers were in self-funded plans, including 80% of workers at firms with 200 or more employees and 27% at firms with 10 to 199 employees.

Smaller employers are looking at partial self-funding more often, because stop-loss coverage and level-funded designs reduce the volatility that once kept them out. A stable workforce and a predictable claims history make the move easier.

Employers with a strong finance function, good claims data and an appetite for managing cost drivers tend to benefit most. Employers that need a fixed monthly cost above everything else often stay with an insured plan.

How Is a Self-Funded Plan Different From a Fully Insured Plan?

The core difference is who pays claims and who keeps the savings. The table below shows the main points of contrast.

The choice is not permanent. Many employers move between structures as headcount, finances and claims experience change.

What Risks Should HR Plan For?

Self-funding rewards good management and punishes surprises. HR should work with the finance team and broker to plan for these exposures:

• Claims volatility: a few high-cost cases can move a full year's spend.
• Cash flow timing: claims are paid as they occur, not in even monthly installments.
• Stop-loss gaps: coverage limits, exclusions and attachment points need a careful read.
• Administrative duty: the employer remains responsible for plan compliance and notices.

Ask for monthly claims reports and know where the stop-loss attachment points sit. Those two habits catch most problems early.

How Should an Employer Decide Whether to Self-Fund?

Start with three questions: how much claims volatility can the budget absorb, how reliable is the claims history, and who will manage the plan. If finance cannot tolerate a bad quarter, self-funding needs a lower stop-loss attachment point or a different structure.

Ask the broker to model a good year, an average year and a bad year side by side, including administrative fees and stop-loss premium. Seeing the downside in dollars usually settles the decision faster than any general discussion.

How Can HR Cloud Help With Self-Funded Plans?

HR Cloud's published pages describe an HRIS, not claims administration or stop-loss management, so a third-party administrator still runs the plan itself. People HRIS keeps employee records, secure document storage with version tracking and approval workflows in one place, which supports the enrollment paperwork around a plan.

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Frequently Asked Questions

Q: Is a self-funded plan the same as a self-insured plan?

A: Yes. Self-funded and self-insured describe the same structure, where the employer pays claims directly instead of paying a premium to a carrier.

Q: Does self-funding mean the employer has no insurance at all?

A: No. Most self-funded employers buy stop-loss insurance that reimburses the plan when individual or total claims pass agreed limits.

Q: Can a small business self-fund its health plan?

A: Yes, usually through stop-loss coverage or a level-funded design. Carriers underwrite the group, so a small employer with several high claimants may not qualify.

Q: Who is responsible for compliance in a self-funded plan?

A: The employer, as plan sponsor, stays responsible even when an administrator handles claims. Hiring a vendor does not transfer legal responsibility.

Q: Do state insurance mandates apply to self-funded plans?

A: Generally no. ERISA keeps most state insurance mandates from reaching self-funded plans, though federal group health rules still apply.

Q: What happens to claim dollars the plan does not use?

A: They stay with the employer. That potential for savings is one of the main reasons employers choose to self-fund.