Employer Guide

Self-Funded Health Plans

Everything employers need to know about self-funding their health plan — from plan design and stop-loss protection to compliance and cost control.

What It Is

A self-funded (or self-insured) health plan is one where the employer assumes direct financial responsibility for employees' health claims rather than paying a fixed premium to an insurance carrier.

Instead of writing a monthly check to a carrier and walking away, the employer pays claims as they occur — retaining the risk, but also retaining the reward. When employees are healthy and claims are low, the savings stay with the employer rather than enriching a carrier's surplus.

To manage catastrophic risk, self-funded employers purchase stop-loss insurance — a reinsurance product that caps exposure at both the individual and aggregate level. Day-to-day administration is typically handled by a Third-Party Administrator (TPA), and pharmacy benefits are managed through a separate PBM contract.

Self-funded plans are governed by ERISA, not state insurance law — which means they are exempt from state-mandated benefits and community rating rules that drive up fully insured premiums.

Key Concepts

How Self-Funding Works

Plan Design

You define the benefits: deductibles, copays, network access, and covered services. No off-the-shelf carrier plan required.

Stop-Loss Insurance

Specific and aggregate stop-loss caps your exposure. Specific covers individual catastrophic claims; aggregate covers total plan liability.

Third-Party Administrator (TPA)

A TPA handles claims adjudication, member services, and plan administration on your behalf.

Pharmacy Benefit Manager (PBM)

Your PBM contract determines drug pricing, formulary design, and rebate flow. Transparent PBM contracts are critical.

Fiduciary Duty

Self-funded employers are ERISA plan fiduciaries. You have a legal obligation to act in plan participants' best interests.

Cash Flow Advantage

You pay claims as they occur rather than pre-paying a carrier premium. Unused reserves stay with you.

Why It Matters

Why It Matters for Employers

"Employers with 50+ employees can save 15–30% vs. fully insured premiums when self-funding is structured correctly."

"Self-funded plans are exempt from state insurance mandates, giving employers flexibility fully insured plans don't have."

"Transparent claims data lets you identify cost drivers and intervene — something fully insured plans rarely allow."

Common Pitfalls

Common Mistakes to Avoid

  1. 1

    Choosing a TPA based on price alone without evaluating claims accuracy and network quality.

  2. 2

    Signing a PBM contract without auditing spread pricing, rebate pass-through, and formulary exclusions.

  3. 3

    Underestimating stop-loss attachment points, leaving the plan exposed to catastrophic claims.

  4. 4

    Failing to establish a plan document and SPD that meet ERISA requirements.

  5. 5

    Not benchmarking claims data annually to identify high-cost claimants and utilization patterns.

FAQ

Frequently Asked Questions

Keep Learning

Related Resources

Resource Library

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Download checklists, calculators, and frameworks for self-funded plan management.

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Practical analysis of employer health plan strategy, ACA compliance, and cost containment.

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Related Pillar

PBM Consulting

Understand how PBM contracts work and how to negotiate transparent pharmacy benefits.

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