Most Arizona small business owners don't know level-funded plans exist. They assume their only options are an expensive group plan or leaving employees to figure it out themselves. Level-funded is the missing middle — and for the right group, it can save 15–30% compared to traditional premiums, with money back at year end if your team stays healthy.
A licensed Arizona broker will analyze your group and present both level-funded and fully-insured options — free, no obligation.
A licensed Arizona broker will contact you within one business day. Your information is never sold. No cost, no obligation.
Why It Matters
Health insurance is the most valued employee benefit after compensation. For small Arizona businesses competing for talent, how you structure it matters as much as whether you offer it at all.
Arizona's small business landscape is intensely competitive for skilled workers. Trades, professional services, technology, healthcare support, retail — across every sector, employees weigh benefits heavily when choosing between employers. A well-structured group health plan signals that a business is stable, serious, and invested in its people.
For the business owner, group health insurance also carries significant tax advantages. Employer premium contributions are fully deductible as a business expense, and employees pay their share with pre-tax dollars — effectively reducing the real cost of coverage for both sides. A well-structured plan is simultaneously a recruiting tool, a retention tool, and a tax strategy.
The challenge for Arizona small businesses — particularly those with 2 to 25 employees — is that traditional fully-insured group plans can be expensive, and premiums increase every year regardless of whether your group had any significant claims. Level-funded plans were developed specifically to address this problem, giving small groups access to cost structures previously only available to large employers.
Employees compare total compensation including benefits. A strong group health plan lets a 10-person Arizona business compete with companies ten times its size for skilled workers who have options.
Employer premium contributions are 100% tax-deductible. Employee contributions are made pre-tax through a Section 125 cafeteria plan, reducing their taxable income. The IRS effectively subsidizes a portion of the plan's cost for both parties.
Replacing an employee costs an estimated 50–200% of their annual salary when recruiting, onboarding, and productivity loss are factored in. Health benefits are one of the highest-impact retention tools available — and often cost less than a single replacement hire.
Both fully-insured and level-funded plans provide a fixed monthly employer contribution — essential for cash-flow-conscious small businesses that need to budget reliably. Level-funded adds the potential for year-end savings on top of that predictability.
Understanding Your Options
Before comparing level-funded and fully-insured directly, it helps to understand the full spectrum of how group health insurance can be structured. There are three fundamental approaches — and understanding where each sits helps explain why level-funded was created and what problem it solves for small Arizona employers.
You pay a fixed monthly premium to the insurance carrier. The carrier assumes all risk and pays all claims. If your group has a great year with low claims, the carrier keeps the difference. If claims are high, the carrier absorbs the loss. Simple, predictable — but you never benefit from your group's good health.
You pay a fixed monthly amount that covers expected claims, stop-loss insurance, and administration. If your group's actual claims come in lower than the funded amount, you receive a portion of the surplus back at year end. Stop-loss insurance caps your maximum exposure — so your monthly cost is fixed, but your upside is real.
The employer pays claims directly as they occur, typically through a Third Party Administrator (TPA). Stop-loss insurance protects against catastrophic claims. Maximum flexibility and cost transparency — but requires significant cash reserves and risk tolerance. The model used by most large corporations and government employers.
Level-Funded — Deep Dive
Plain language first — then the details for those who want to understand the mechanics before talking to a broker.
Every month you pay the same fixed amount — hence "level-funded." That amount is calculated based on your group's expected claims (derived from your employees' ages and health history), plus the cost of stop-loss insurance that protects you against unexpectedly high claims, plus a fee for the plan administrator who processes everything.
At the end of the year, the administrator looks at what your group actually spent on claims versus what was in the fund. If your employees stayed healthy and claims came in lower than expected, you get a portion of that unspent money back. If claims ran higher than expected, the stop-loss insurance kicks in — and your maximum exposure is capped at your fixed monthly payment regardless of what happened.
That's the deal: fixed monthly cost going in, potential money back at year end, and a hard ceiling on your worst-case exposure. Fully-insured plans offer none of those last two features.
Traditionally, self-funded arrangements were only practical for large employers because the risk pool was large enough to be predictable. A company with 5,000 employees can statistically model expected claims with high confidence. A company with 15 employees cannot.
Level-funded solves this by layering stop-loss insurance on top of the self-funded structure. The stop-loss carrier — often a separate entity from the claims administrator — agrees to absorb any claims above a defined threshold per employee (specific stop-loss) and any aggregate claims above a defined total (aggregate stop-loss). With those protections in place, even a small group can participate in a self-funded structure without meaningful catastrophic risk.
This is one of the most financially significant differences between level-funded and fully-insured in the Arizona small group market. Fully-insured ACA small group plans are community rated — meaning carriers cannot price based on your group's health history. Everyone in the same age bracket pays roughly the same rate, regardless of whether your employees are healthy 30-year-olds or have significant ongoing conditions.
Level-funded plans underwrite based on your group's actual health census. A group of healthy employees — especially younger, active ones with no significant conditions — will receive a level-funded quote that is meaningfully lower than the community-rated fully-insured equivalent. This is where the 15–30% savings often comes from. Groups with significant health conditions may not see savings, or may not qualify for level-funded at all — which is why a broker runs both quotes before making a recommendation.
How It Works — Step by Step
Your broker collects basic employee information — ages, whether they're enrolling dependents, and in most cases a brief health questionnaire. This data is used to underwrite the group and calculate the level payment amount.
Based on the census and health data, the carrier calculates three components: expected claims cost, stop-loss insurance premium, and administration fee. These are combined into a single fixed monthly payment per employee.
Regardless of whether any employee has a major claim that month — or no claims at all — the employer pays the same level monthly amount. This is what makes budgeting simple and predictable throughout the year.
As employees use their benefits throughout the year, claims are paid out of the accumulated monthly payments. The Third Party Administrator (TPA) processes and pays claims — not the employer directly.
If any single employee has an unusually expensive year — a cancer diagnosis, a major surgery — specific stop-loss insurance absorbs those costs above the per-person threshold. Aggregate stop-loss caps the total group exposure. You never pay more than your fixed monthly amount.
At plan year end, if actual claims came in below the funded amount, the surplus — or a defined percentage of it — is returned to the employer. A healthy group that had few claims could receive a meaningful check. A fully-insured carrier would keep that money.
At renewal, the carrier reviews your group's actual claims experience. A healthy group with low claims typically sees favorable renewal rates. This is another advantage over community-rated fully-insured plans, where renewal increases are driven by market-wide trends regardless of your group's performance.
The Protection Mechanism
Stop-loss insurance is what makes level-funded plans safe for small Arizona businesses. Understanding how it works removes any concern about catastrophic exposure.
The most common hesitation business owners have about anything involving "self-funding" is the fear of a catastrophic claims year — an employee diagnosed with cancer, a premature birth, a major accident. Stop-loss insurance is the mechanism that makes this concern irrelevant in a properly structured level-funded plan.
Stop-loss insurance is purchased by the plan (included in your level monthly payment) from a stop-loss carrier. It acts as reinsurance — insurance for the insurance fund itself. There are two distinct types, and most level-funded plans include both.
With both specific and aggregate stop-loss in place, your financial exposure is definitively capped. The worst-case scenario for a level-funded employer is paying their fixed monthly payment for 12 months and having the stop-loss carrier absorb everything above the thresholds. In practice this means your exposure is no worse than a fully-insured plan — and in a good claims year, meaningfully better.
Your broker will review the stop-loss attachment points (the thresholds at which coverage kicks in) as part of comparing level-funded quotes. Higher attachment points generally mean lower stop-loss premiums — but also higher potential out-of-pocket exposure before stop-loss activates. Finding the right balance is part of the broker's analysis.
Specific stop-loss protects against any single employee having an extraordinarily expensive claims year. Once one employee's claims exceed the specific deductible — commonly set between $20,000 and $75,000 depending on group size and plan design — the stop-loss carrier pays 100% of that individual's claims above the threshold for the rest of the year. Even if an employee is diagnosed with cancer mid-year, your plan fund is protected from that one person's costs spiraling beyond the attachment point.
Aggregate stop-loss caps your total group claims exposure for the entire plan year. If total claims across all employees exceed the aggregate attachment point — typically 120–125% of expected annual claims — the aggregate stop-loss carrier absorbs everything above that threshold. This protects against scenarios where multiple employees have moderately expensive years simultaneously, which individual specific stop-loss wouldn't cover if no single person exceeded their individual threshold.
The Year-End Advantage
This is the feature that makes level-funded fundamentally different from fully-insured — and the one most Arizona business owners find most compelling once they understand it.
In a traditional fully-insured group plan, your premium is fixed. If your employees barely use their benefits — a year of good health, no major claims, low prescription use — the carrier keeps every dollar of unused premium. The business owner gets nothing back. The premium next year likely still goes up.
Level-funded plans work differently. Because your monthly payments go into a dedicated claims fund rather than simply disappearing into an insurance carrier's general pool, there is a real accounting of what was funded versus what was actually spent on claims. When claims come in lower than funded, that money still exists — and depending on the plan's terms, a portion is returned to the employer at year end.
The exact surplus sharing arrangement varies by carrier and plan design. Some plans return 50% of unused claims funds. Others return higher percentages. Your broker will highlight the surplus terms as part of comparing quotes. Even a 50% return on a meaningful surplus can represent thousands of dollars back to the business — dollars that a fully-insured carrier would have simply retained.
It's important to have realistic expectations: not every year produces a surplus, and a year with high claims may produce none. But over a multi-year period with a healthy group, the combination of health-based pricing and potential surplus returns is typically where the 15–30% cost advantage over fully-insured becomes real.
Honest Assessment
Level-funded isn't the right choice for every group. Here's an honest look at who benefits most — and when fully-insured remains the better option.
Level-funded underwriting is health-based. A group where most employees are in good health and have no significant ongoing conditions will receive competitive quotes — and is more likely to see year-end surplus returns.
The sweet spot for most Arizona level-funded plans is 5–50 employees. Below 5, underwriting risk is harder to price accurately. Above 50, true self-funding options become more accessible.
Level-funded plans provide detailed claims data — something fully-insured carriers don't share. Owners who want to understand what's actually driving their healthcare costs value this transparency.
High employee turnover creates underwriting volatility. A business with low turnover and a stable team is better positioned to build a favorable claims history that benefits renewals over time.
If several employees have expensive ongoing conditions — cancer, dialysis, specialty medications — level-funded underwriting may produce a quote higher than the community-rated fully-insured alternative, or coverage may be declined.
Very small groups are harder to underwrite for level-funded. Fully-insured community-rated plans — or individual ACA marketplace plans — may be more appropriate for businesses with 2–4 employees.
A broker collects your group census, runs quotes from multiple level-funded carriers alongside fully-insured options, and presents a side-by-side comparison showing total annual cost, benefit levels, network options, and surplus terms. You see both options with real numbers before making any decision. The broker's fee is paid by the carrier — there is no cost to you for this analysis.
Side-by-Side
This table covers every meaningful dimension a small Arizona business owner should evaluate when choosing between a fully-insured and a level-funded group health plan. Your broker will walk through each line item with real numbers from actual quotes for your group.
| Fully-Insured Traditional ACA Small Group | Level-Funded Self-Funded with Stop-Loss | |
|---|---|---|
| Monthly Cost Predictability | Fixed premium — same amount every month regardless of claims | Fixed level payment — same amount every month regardless of claims |
| Pricing Basis | Community rating — age-based, same for all groups in the market | Health-based underwriting — healthy groups pay less than market average |
| Year-End Surplus | Carrier keeps all unused premium — no refund regardless of low claims | Surplus returned to employer — percentage of unused claims fund returned |
| Catastrophic Claims Protection | Carrier absorbs all — no additional employer exposure | Stop-loss caps exposure — both specific (per person) and aggregate (total) |
| ACA Compliance | Fully ACA-compliant — all essential health benefits required | Self-funded rules apply — exempt from some ACA requirements (e.g. community rating) |
| Claims Data Access | No access — carrier owns the data, employer sees only premium invoices | Full claims transparency — employer receives detailed claims reporting |
| Renewal Pricing | Market-driven increases — your group's health history has limited impact | Experience-rated — healthy group with low claims history = favorable renewal |
| Plan Design Flexibility | Limited — standard plan designs from carrier portfolio | More flexible — deductibles, co-pays, networks more customizable |
| Employee Size | Available for any size — default option for 2–4 employees | Best for 5–50 — underwriting improves with group size |
| Underwriting Process | No health questions — guaranteed issue for ACA small groups | Health questionnaire required — groups with poor health may not qualify or may pay more |
| Typical Premium vs. Market | At or above market community rate | 15–30% below fully-insured equivalent for healthy groups |
| Best For | Any size group; groups with known health conditions; businesses wanting maximum simplicity | Healthy groups of 5–50; owners who want cost transparency and potential savings |
Working With a Broker
Group health is more complex than individual coverage. A broker's role goes well beyond sending you a quote — they're a long-term benefits partner for your business.
The broker collects your employee roster, dependent information, and current benefits — then asks about your budget, your team's priorities, and whether you've had any large claims. This sets the foundation for an accurate quote.
The broker shops your group to multiple carriers simultaneously — both fully-insured and level-funded — and presents a side-by-side comparison with real numbers. You see the true cost difference before making any decision.
Beyond the funding type, the broker recommends specific plan designs — deductible levels, co-pay structures, HSA eligibility, network options — based on your employees' needs and your budget. They explain the tradeoffs clearly.
When you're ready to enroll, the broker helps communicate the plan to employees, answers their questions, and manages the enrollment process. This is often the most time-consuming part — and the broker handles it.
A good broker doesn't disappear after enrollment. They're available throughout the year for employee questions, claims issues, and mid-year changes — and they conduct a full renewal review each year to make sure you're still in the optimal plan.
A licensed Arizona group health broker will collect your census, run both fully-insured and level-funded quotes, and present a clear side-by-side comparison — at no cost to your business. Broker fees are paid by the carrier.
Request My Free Group Analysis → Or try the AI Coverage Advisor first →Common Questions
A licensed Arizona group health broker will run both fully-insured and level-funded quotes for your group and show you a true side-by-side comparison — completely free of charge.
Get My Free Group Health Analysis → Or try the AI Coverage Advisor first →