Your health plan renewal comes in high, and two options land on your desk. One is a level-funded health plan. The other is joining a PEO and moving your team onto its health plan. Both show up as one fixed monthly bill. Underneath, they work very differently.

A level-funded health plan is a self-funded plan with a fixed monthly payment. That payment funds a reserve for your employees' claims, an administrative fee and a stop-loss insurance premium (KFF, 2025; 88 FR 44604). A PEO health plan is the PEO's own plan. It covers your employees together with employees of the PEO's other clients (DOL MEWA guide, p. 23).

Three questions separate them: whose claims set your price, who keeps a surplus, and who pays when claims run high. This guide answers each one with the rule behind it.

Level-funded plans are not a niche product. In KFF's 2025 survey, 37% of firms with 10 to 199 workers that offer health benefits offered a level-funded plan, and 37% of covered workers at those firms were enrolled in one.

What a level‑funded health plan is

You pay the same amount every month, like a premium. KFF says that amount covers "a share of the estimated annual cost for benefits, premiums for the stoploss protection, and an administrative fee," with the potential for some reconciliation at the end of the year (KFF, 2025).

Legally, the plan is self-funded. Your company, not an insurer, owes your employees' claims up to the stop-loss limits. That has consequences:

  • State insurance rules mostly don't reach it. Federal regulators note that level-funded plans are "typically not regulated by States" (88 FR 44632).
  • ACA small-group rules don't apply either. KFF calls these plans "nominally self-funded." When they are sold to employers with fewer than 50 workers, they are not subject to the ACA's rating and benefit standards for small firms (KFF, 2025).

A level-funded plan looks like insurance on the invoice, but your company carries the claims risk up to the stop-loss limits. Federal regulators have flagged that, because small employers pay a monthly amount that resembles a premium, they may not understand whether their plan is self-funded or insured (88 FR 44633).

Uptake grew fast. KFF figures quoted by the Departments show 13% of small employers offering a level-funded plan in 2020, 42% in 2021 and 38% in 2022 (88 FR 44632). Those years counted employers with 3 to 199 workers. The 2025 figure above counts 10 to 199, so the numbers don't form one trend line.

How a PEO health plan is set up

When you join a PEO, your employees usually move onto the PEO's health plan. Once that plan covers employees of two or more clients, the Department of Labor treats it as a multiple employer welfare arrangement, or MEWA, under ERISA. The PEO's status as a co-employer under other laws doesn't change that (DOL MEWA guide, p. 23).

A PEO plan can be built two ways:

  • Fully insured. An insurer pays the claims. State law can still set reserve and contribution standards for the arrangement.
  • Self-funded. The plan itself pays the claims. Here, "any law of any state which regulates insurance may apply," as long as it doesn't conflict with ERISA (DOL MEWA guide, p. 23).

Some states limit the second option. New York's insurance regulator said a PEO self-funding health benefits for New York residents "would not be permitted" (NY DFS Opinion 05-03-17, 2005). Florida says no licensed employee leasing company "shall sponsor a plan of self-insurance for health benefits," except as the Florida Insurance Code or ERISA allows (Fla. Stat. 468.529(1)). Our PEO licensing by state guide covers the wider state rules.

MEWAs also have federal paperwork. They file Form M-1 with the Department of Labor every year by March 1, and register 30 days before operating in a state (DOL MEWA guide, p. 33).

PEOs describe their master plans as large-group plans. Whether federal large-group rules apply to your company depends on how the plan is structured (CMS, 2011). Before you compare prices, ask the PEO in writing: is this plan fully insured or self-funded? For how PEO pooling and plan options work day to day, see PEO health insurance and how PEO benefits work.

Level‑funded vs PEO plan: stop‑loss, refunds and renewals side by side

This compares how each is built, not what either costs you.

Level-funded plan vs PEO health plan: how each is built
Level-funded planPEO health plan (fully insured unless stated)
Legal statusSelf-funded ERISA plan; "typically not regulated by States" (88 FR 44632)A MEWA under ERISA once it covers 2 or more clients (DOL MEWA guide, p. 23). Files Form M-1 yearly by March 1 (p. 33)
Who pays claimsYour plan, up to the stop-loss attachment points. Stop-loss pays above them (88 FR 44604; KFF 2025)Fully insured: the insurer "assumes financial responsibility for the costs of enrollees' medical claims" (KFF 2025 glossary). PEO self-funding is barred for New York residents (NY DFS Op. 05-03-17) and limited in Florida (Fla. Stat. 468.529(1)). Ask which yours is
Stop-lossBuilt in, with "relatively low attachment points" (KFF 2025). If the stop-loss carrier denies a claim, you stay liable (88 FR 44633). State floors vary. Example: New Hampshire, 50 or fewer covered employees, aggregate attachment point at least the greatest of $6,200 × covered lives, 120% of expected claims or $31,000 (NHID, Aug 2026). New York bars insurers from selling stop-loss to small groups (Ins. Law §3231(h)(1))You buy none. In a fully insured plan the insurer carries the risk (KFF 2025 glossary). If the PEO plan is self-funded, state insurance law can apply in full (DOL MEWA guide, p. 23)
SurplusRefunded, or carried into next year (88 FR 44604). Whether employees get their share is an open question (88 FR 44634)No claims account of your own. A medical loss ratio rebate only if the insurer spends under 80% or 85% of premium on care, figured on all similar-sized groups in the state over 3 years (CMS model notice; 45 CFR 158.210). Paid to the policyholder; the employee share is plan assets (DOL TR 2011-04)
RenewalPriced on your claims: next year's payments "may, and oftentimes do, increase" (88 FR 44604). Health status used in rating (KFF 2025). Generally not treated as subject to guaranteed renewability or the single risk pool (88 FR 44633)No public rule sets how your company is rated. Ask in writing: whole PEO group or your census, 3-year renewal history, any cap
Benefits floorNot required to cover all essential health benefits (KFF 2025; 88 FR 44633 n. 208)Depends on which market rules apply. In most cases each employer's size decides small- vs large-group rules for association and MEWA coverage (CMS, Sept 1, 2011). A PEO plan may be one multiple-employer plan or a set of client plans (DOL MEWA guide, p. 23). Ask which
Under 20 employeesNo federal COBRA, and no state continuation, because the plan counts as self-insured (88 FR 44632 n. 202)Ask in writing which continuation rules apply

Sources: KFF 2025 Employer Health Benefits Survey; 88 FR 44596 (Jul 12, 2023); DOL EBSA MEWA guide (rev. Apr 2022); DOL Technical Release 2011-04; CMS model MLR rebate notice; CMS bulletin (Sept 1, 2011); NH Insurance Department Bulletin INS 26-051-AB; NY Ins. Law §3231; NY DFS Opinion 05-03-17; Fla. Stat. 468.529. Full links below.

Stop‑loss: where the risk sits in a level‑funded plan

Stop-loss insurance protects the plan, not your employees. It has two triggers: one for a single person's large claims (specific) and one for the plan's total claims for the year (aggregate). The level where each kicks in is the attachment point. KFF says level-funded plans pair "a relatively small self-funded component with stop-loss insurance," using relatively low attachment points (KFF, 2025).

Flowchart of a level-funded plan. Your fixed monthly payment splits into an administrative fee, a stop-loss premium and a claims reserve. The reserve pays claims up to the stop-loss limits; the stop-loss carrier pays claims above them, and if it denies a claim your company remains liable. If claims come in under the reserve at year end, the surplus may be refunded or carried over, as your contract sets.
Where the money goes in a level-funded plan.

Here is the catch federal regulators flagged. A stop-loss policy can deny or limit a claim in ways the federal protections for group health plans would not allow. If the stop-loss carrier denies a claim, "the small employer remains liable for the claim" (88 FR 44633).

States regulate the stop-loss policy, not your plan. Two examples show how far apart they are:

  • New Hampshire. For groups of 50 or fewer covered employees, the aggregate attachment point must be at least the greatest of $6,200 times covered lives, 120% of expected claims, or $31,000 (NHID Bulletin INS 26-051-AB, Aug 2026). Those figures come from the department's current rules. They are minimums, and they apply only in New Hampshire.
  • New York. The statute is direct: "No insurer may provide stop loss, catastrophic or reinsurance coverage to small groups" (NY Ins. Law §3231(h)(1)). In 2016 the state's regulator warned insurers against delivering stop-loss from out of state to New York small groups of 1 to 100 employees (NY DFS, 2016).

Two more things change when the plan counts as self-insured:

  • Continuation coverage under 20 employees. Federal COBRA doesn't apply to employers with fewer than 20 employees. State continuation laws usually fill that gap for insured plans, but they don't reach a self-insured plan (88 FR 44632, note 202).
  • Benefits. Level-funded plans are not required to cover all of the essential health benefits that insured small-group plans must cover (KFF, 2025).

Who keeps the surplus

In a level-funded plan, your own claims decide whether there is a surplus. In a fully insured PEO plan, your own claims don't create a refund of their own.

With a level-funded plan, if claims come in under the money set aside for them, the plan or the employer generally gets a refund or carries the surplus into the next plan year (88 FR 44604). KFF's wording is careful: a surplus "may be refunded at the end of the contract" (KFF, 2025). The contract sets the formula, so read it.

One question is still open. In 2023 the Departments asked how these refunds are calculated and whether they are passed to employees who paid part of the premium (88 FR 44634). No rule has answered it. The 2024 final rules left level-funded plans unaddressed (89 FR 23338).

A fully insured PEO plan works differently. Your company has no claims account of its own. The only refund is a medical loss ratio (MLR) rebate. Under the ACA, an insurer owes one when it spends less than 80% (small group) or 85% (large group) of premium on care and quality (45 CFR 158.210). It is calculated on "all similar-sized groups insured by an insurer in a state, using a three-year average," not on your group (CMS model MLR notice).

That rebate goes to the policyholder. The part of it that came from employee contributions is a plan asset (DOL Technical Release 2011-04). Ask the PEO who the policyholder is and how a rebate would reach your employees.

What happens at renewal

With a level-funded plan, a bad claims year follows you. After one, the next year's monthly payments "may, and oftentimes do, increase to adjust to the plan's claims experience" (88 FR 44604).

Two rules that protect insured small groups don't apply the same way:

  • Health status counts. Unlike insured plans, level-funded plans use health status in rating and underwriting (KFF, 2025).
  • No guaranteed renewal on small-group terms. Level-funded plans generally aren't treated as subject to the guaranteed-renewability and single-risk-pool rules of insured small-group coverage (88 FR 44633).

With a PEO plan, how your company's rate is set isn't in any public rule. Ask the PEO in writing: is your rate set on the PEO's whole group or on your own employee census? What is the plan's renewal history for the last 3 years? Is any increase capped? Our PEO health insurance guide has a checklist for testing a PEO's health-insurance savings quote, and a section on what the 2027 small-group renewals look like.

Rules that could change

Level-funded plans sit in a gap that regulators and lawmakers are still working on.

  • July 12, 2023. The Departments of Labor, Health and Human Services and the Treasury asked for public input on level-funded plans (88 FR 44596).
  • April 3, 2024. The final rules did not address them. The Departments said they would consider "whether additional guidance or rulemaking is warranted in the future" (89 FR 23338).
  • December 17, 2025. The House passed H.R. 6703, 216 to 211. Section 102 would amend ERISA so a stop-loss policy bought by a self-insured plan is not "health insurance coverage." It would also override state laws that stop a group health plan from insuring against excess claims losses (bill text). The Senate received it on December 18, 2025, and the bill status shows no later action (bill status). It has passed the House only. It is not law.
  • August 13, 2026. New Hampshire issued its stop-loss guidance, described above (NHID, 2026).

State rules vary and are changing. If you sign a level-funded plan, check what your state requires at each renewal.

Questions to ask before you choose either

For a level-funded plan:

  • What are the specific and aggregate attachment points, and who sets them? (Federal regulators asked this too, 88 FR 44634.)
  • How is the surplus refund calculated, when is it paid, and do you have to renew to get it?
  • What happens to claims incurred before you leave but billed after?
  • Which benefits differ from your current insured plan?
  • If you have fewer than 20 employees, what continuation coverage applies?

For a PEO plan:

  • Is the plan fully insured or self-funded?
  • Who is the policyholder, and how would a rebate reach employees?
  • Is your rate set on the PEO's whole group or on your own census?
  • What is the 3-year renewal history, and is any increase capped?
  • What does your coverage look like if you leave? See what happens when you leave a PEO, our questions to ask a PEO and PEO contract terms.

Compare total cost, not just premium. A PEO's administrative fee typically runs $40 to $160 per employee per month, or 2% to 12% of payroll, with most quotes at 3% to 5% (PEO administrative fee). Check what sits outside that fee in hidden PEO fees. If you have 50 or more full-time employees, the ACA employer rules apply to either choice; see PEO and ACA compliance.

If you are weighing a PEO plan and want help reading the quote, you can Request a Consultation. We connect you with our independent broker, and the process takes several business days. The consultation is free to you. If you sign through the broker, he shares part of his fee with us.

The bottom line

Neither option is cheaper by default. With a level-funded plan, your own claims drive the refund and the renewal. With a fully insured PEO plan, the insurer carries the claims, and your price depends on how the PEO rates you. Decide which risk you can live with first. Then compare prices.

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