October 1st, 2026 – Level Funded health plans offer small employers the financial advantages of self-insurance combined with the protection of a stop-loss overlay. By allowing healthy groups to capture financial savings and participate in a 50% share of accumulated claims surplus, this structure provides a compelling alternative to traditional health coverage when employee medical claims remain low.
However, for micro-groups, routine or unexpected workforce reductions during the policy year can uncover 2 hidden financial traps, as this video illustrates:
The take away is NOT that Level Funding is bad, but that when groups’ enrolled head count falls to roughly 8 or so employees, it can cause Level Funded plans to fail and force the group back into the fully insured market. Even if the group experienced an amazingly healthy year, that enrollment drop can create a mathematical trap with 2 financial consequences:
- The renewal trap can occur because under Colorado Revised Statutes § 10-16-119.5, insurers cannot issue stop-loss coverage to small employers with an annual aggregate attachment point lower than the greater of 120% of expected claims or $20,000. A huge renewal increase may be required to fund the state-mandated minimums, regardless of how healthy the remaining group members are.
- The surplus trap occurs when a microgroup with low medical usage and a healthy claims surplus is forced off a Level Funded platform due to regulatory cost spikes. If they leave the plan, most Level Funding contracts require the group to forfeit their share of the plan’s surplus, which is financial reward of good claims experience.
Fully insured or PEO plans are often a better fit for microgroups where employee head counts may fall below roughly 8 enrolled employees. Fully Insured plans shield employers from these headcount-driven funding traps.