Self-Funded Health Plan

Key facts

Also called

Self-insured plan

Federal law

Employee Retirement Income Security Act of 1974 (ERISA), for private employers

Federal regulator

U.S. Department of Labor, Employee Benefits Security Administration

State insurance law

Generally preempted by ERISA for private-sector plans

Common risk protection

Stop-loss insurance purchased by the employer

What is a self-funded health plan?

In a fully insured plan, the employer pays a fixed premium and the insurer takes the risk that claims cost more than expected. In a self-funded plan, the employer keeps that risk: it pays claims as they occur, often through a trust or dedicated account, and keeps the savings if claims are lower than expected.

Most self-funded employers do not process claims themselves. They sign an administrative services only (ASO) contract with an insurance company or a third-party administrator (TPA), which supplies the provider network, claims processing and customer service. Members often carry an insurer-branded card and may not know their plan is self-funded.

Self-funding is most common among large employers. Smaller employers sometimes use level-funded arrangements, which combine fixed monthly payments with self-funding and stop-loss coverage.

How self-funded plans are regulated

Private-sector self-funded plans follow a different rulebook from insured plans:

• ERISA generally preempts state insurance laws, so state benefit mandates, premium taxes and many state step therapy or copay accumulator laws do not apply.
• Many federal rules still apply, including ACA preventive services coverage, dependent coverage to age 26, and bans on annual and lifetime dollar limits for essential health benefits.
• The ACA medical loss ratio rules and the essential health benefits package requirement do not apply.
• Government and church plans are generally exempt from ERISA, so different rules apply to them.

Why self-funded plans matter

Because the employer pays the claims, it has the final say on benefit design, even when an insurer brand is on the card. Pharmacy benefit contracts, specialty drug carve-outs and coverage of high-cost therapies such as gene therapies are often decided by the plan sponsor and its advisers.

The Consolidated Appropriations Act, 2021 added obligations for group health plans, including self-funded ones: a ban on gag clauses that block access to cost and quality data, and annual reporting on prescription drug and health care spending. Plan sponsors also act as ERISA fiduciaries, which has increased scrutiny of how they manage drug costs.