Level-funded health plans are rising in popularity. Employers are gravitating toward the plans based on promises of consistent monthly payments, possible refunds, and fewer administrative responsibilities. Insurance companies market the plans as similar to self-funded plans in terms of cost efficiency, while guaranteeing fully insured premiums. However, the reality is that level-funded health plans pose risks to employers that they may not realize exist. These risks include unexpected administrative expenses, fiduciary responsibilities, financial liabilities, penalties for regulatory noncompliance, and the requirement to advance all claims payments.
First, the financial coverage for the employer in these health plans excludes most administrative expenses, such as fees for audits, case management, PBM services, clinical reviews, subrogation, and fixing claims errors. Therefore, employers incur many more costs than expected.
Next, employers may assume that since a large insurance company is processing their claims, it also holds fiduciary responsibility. However, insurance companies often decline to assume fiduciary responsibility, stating that they are only ensuring compliance. However, these companies are not plan administrators. As a result, the employers must assume full fiduciary responsibilities and complete the duties of plan administrators. Under the Employee Retirement Income Security Act (ERISA), the entity that assumes responsibility also assumes liability, meaning employers unknowingly place themselves in a position where they are liable for any losses.
Another common issue for employers is cross-plan offsetting. This practice allows the insurance company to use funds from one health plan to recover money that a separate health plan allegedly owes. According to both federal courts and the U.S. Department of Labor (DOL), cross-plan offsetting raises serious problems under ERISA. Ultimately, if regulators determine that cross-plan offsetting is a prohibited transaction under ERISA, the employer will bear fiduciary liability for the insurance company’s actions.
Level-funded plans also routinely use pharmacy rebates to benefit the carrier rather than the plan. Employers who enter these plans assume that the rebate savings will flow to the plan and save them money. However, in reality, employers rarely ever see any savings from these rebates.
Yet another problem with level-funded plans is the prevalence of gag clauses, which restrict access to provider cost and quality data. These clauses require the filing of a Gag Clause Attestation. If a plan fails to file the required attestation, the employer can face penalties of $100 per participant per day. An incorrect attestation filing becomes a fiduciary breach. This fiduciary oversight can also trigger a DOL fiduciary audit.
A common feature of level-funded plans is a lack of compliance safeguards required by federal and state laws. Laws such as the Affordable Care Act (ACA), the Health Insurance Portability and Accountability Act (HIPAA), and the Mental Health Parity and Addiction Equity Act (MHPAEA) all impose certain requirements on employers. If the plans lack these safeguards, the employer — not the insurance company — can face penalties for noncompliance.
Finally, employers must advance all claim payments under level-funded plans. While carriers can advance funds, they are not required to do so. If reimbursement is delayed or denied, then carriers can withdraw funds from employer accounts. The outcome is that if monthly claims exceed funding, the employer can experience significant financial problems.
The bottom line is that employers need the information to properly assess the risks before signing on to these plans. Employers should have advisors with fiduciary expertise review all such contracts and clearly explain the potential risks before agreeing to a level-funded health plan.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
Hall Benefits Law, LLC
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- The Risks of Level-Funded Health Plans - March 18, 2026
