If you're a small to mid-sized business owner looking at your 2026 health insurance renewal and feeling that familiar sinking feeling in your stomach, you're not alone. Traditional fully insured premiums are climbing yet again, and many employers are searching for alternatives that won't break the bank.
Enter level funding, a hybrid approach that's gaining serious traction among businesses with 10-100 employees. But here's the thing: level funding isn't just about lower monthly payments. It comes with its own set of compliance obligations that you absolutely need to understand before making the switch.
What Is Level Funding, Anyway?
Think of level funding as the "Goldilocks" option for group health insurance for employers. It sits right between being fully insured and self-funded, giving you some of the cost-saving benefits of self-funding without all the risk.
Here's how it works: You pay a fixed monthly amount (hence "level" funding) that covers three components: expected claims, stop-loss insurance to protect against catastrophic costs, and administrative fees. At the end of the plan year, if your employees' claims come in lower than projected, you get money back. If claims are higher, your stop-loss coverage kicks in to protect you.
Unlike traditional fully insured plans where the insurance carrier keeps all the surplus (and you never see a dime back), level funding lets you participate in the upside when things go well. For many businesses, this has meant getting refunds of $20,000 to $100,000+ at year-end.
Why 2026 Is a Critical Year for Level Funded Plans
The regulatory landscape for level funded plans has evolved significantly, and 2026 brings renewed focus on compliance. The IRS, Department of Labor, and Department of Health and Human Services are all paying closer attention to how these plans operate: and whether employers are meeting their obligations.
The key distinction you need to understand: level funded plans are technically self-funded plans from a legal perspective. This means they're subject to ERISA (Employee Retirement Income Security Act) requirements and aren't regulated by state insurance departments the way fully insured plans are.
This classification brings both advantages (exemption from certain state mandates and premium taxes) and responsibilities (federal reporting requirements that many employers aren't prepared for).
Your 2026 Compliance Checklist for Level Funded Plans
ACA Reporting: The 1095-C and 1094-C Forms
If you have 50 or more full-time equivalent employees, you're an Applicable Large Employer (ALE) under the Affordable Care Act. This means you must file Forms 1095-C for each employee and Form 1094-C as a transmittal to the IRS: typically due by March 31, 2027 for the 2026 plan year.
These forms document that you offered minimum essential coverage that was affordable and provided minimum value. Get this wrong, and you could face Employer Shared Responsibility Payment penalties of $2,970 per full-time employee (indexed for 2026) if even one employee receives a premium tax credit on the marketplace.
Many employers assume their insurance carrier or third-party administrator handles this reporting automatically. Sometimes they do: but sometimes they don't. Before January 1, 2026 rolls around, confirm in writing exactly who is responsible for preparing and filing these forms.
PCORI Fees: The Fee You Probably Forgot About
Here's a compliance requirement that catches many level funded plan sponsors off guard: the Patient-Centered Outcomes Research Institute (PCORI) fee. This fee applies to all self-funded health plans, including level funded arrangements.
For plan years ending in 2026, the PCORI fee is $3.22 per covered life (the rate increases slightly each year based on inflation). You calculate it based on the average number of covered lives during the plan year and file it using IRS Form 720 by July 31, 2027.
The dollar amount per employee might seem small, but multiply it by your total covered lives, and it adds up. For a company with 75 employees and dependents totaling 150 covered lives, that's $483 annually. It's not a huge expense, but it's one that must be paid: and penalties for non-payment can be substantial.
The Consolidated Appropriations Act: Transparency Requirements
The Consolidated Appropriations Act (CAA) of 2021 introduced sweeping transparency requirements for group health plans requirements that took full effect in recent years. If you're sponsoring a level funded plan in 2026, you need to ensure compliance with several key provisions:
No Surprises Act Protections: Your plan must protect participants from surprise medical bills for emergency services and certain non-emergency services at in-network facilities. Most level funding carriers and TPAs have built these protections into their plans, but verify this is in place.
Transparency in Coverage Rules: Your plan must provide machine-readable files with negotiated rates and allowed amounts. These files must be posted on a public website. Again, your TPA typically handles this, but it's your responsibility as the plan sponsor to ensure it's happening.
Gag Clause Attestation: By December 31, 2026, you must attest that your plan contracts don't contain gag clauses that restrict access to claims and payment data. This is filed through a federal portal and takes about five minutes: but missing it can create compliance headaches.
Broker and Consultant Compensation Disclosure: Your broker or consultant must disclose all direct and indirect compensation they receive in connection with your plan. As an independent broker, we provide this transparency upfront because we believe you deserve to know exactly how we're compensated for our work.
The Real Cost Picture: Beyond Your Monthly Payment
When evaluating level funded plans for 2026, you need to look beyond the attractive monthly premium. Here's what goes into your total cost picture:
Fixed Monthly Costs: Your level payment typically covers expected claims (called the "claims fund"), stop-loss premiums, and administrative fees. For a company with 50 employees, monthly payments might range from $30,000 to $60,000 depending on demographics and coverage level.
Claims Volatility: Even with stop-loss coverage, you'll have a specific deductible (per individual) and aggregate deductible (for the whole group). Your specific deductible might be $30,000-$50,000, meaning you're on the hook for claims up to that amount per person before stop-loss kicks in.
Surplus Opportunity: The flip side? If your group is healthy and claims come in under projections, you get money back. We've seen employers receive refunds ranging from 10% to 30% of their annual premium spend.
Implementation Costs: Factor in one-time setup costs for plan documents, Summary Plan Descriptions, ERISA wrap documents, and potentially Form 5500 filing assistance if your plan is unfunded.
Who Should Consider Level Funding in 2026?
Level funding isn't right for every employer, but it's worth serious consideration if you:
- Have 10-100 employees (some carriers go higher)
- Have a relatively healthy employee population
- Can handle monthly cash flow without rate fluctuation (remember, it's "level" funding)
- Are comfortable with some claims risk in exchange for potential refunds
- Want more control and transparency over your healthcare spending
- Are willing to manage the additional compliance requirements
Groups with very high ongoing claims or significant known health issues might not qualify or might not benefit from level funding. Your claims history and employee demographics will determine whether carriers will offer you competitive rates.
Common Pitfalls to Avoid
Pitfall #1: Assuming "Level Funding" Means "Set It and Forget It"
The compliance requirements don't disappear just because you're paying a fixed monthly amount. You're still the plan sponsor with fiduciary responsibilities under ERISA.
Pitfall #2: Not Understanding Your Stop-Loss Coverage
Read your stop-loss policy carefully. Some policies have lasers (higher deductibles for specific high-cost individuals), waiting periods for pre-existing conditions (where allowed), or exclusions that could leave you exposed.
Pitfall #3: Failing to Maintain Required Plan Documents
Level funded plans need a formal plan document, Summary Plan Description, and typically a wrap document. These aren't optional: they're legal requirements. Missing or outdated documents can create liability during an audit or lawsuit.
Pitfall #4: Not Planning for Renewal Volatility
While your payments are level during the plan year, your renewal rates will adjust based on your claims experience. A year with high claims can mean a significant increase at renewal, even if you have stop-loss protection.
The Bottom Line on Level Funding
For the right employer, level funding represents a smart middle path that delivers cost savings, transparency, and potential refunds while limiting risk through stop-loss coverage. But it's not a simple plug-and-play solution: it requires active management and compliance attention.
As we move through 2026, regulatory scrutiny of group health plans requirements continues to increase. The penalties for non-compliance with ACA reporting, PCORI fees, and CAA requirements are real and growing. The good news? With the right guidance and administrative support, these requirements are entirely manageable.
The key is working with professionals who understand both the benefits and the compliance landscape. As an independent broker, we shop multiple level funding carriers to find the best fit for your specific situation: and we help you navigate the regulatory requirements that come with it.
Ready to Explore Level Funding for Your Business?
At Total Benefit Solutions, we specialize in helping small and mid-sized businesses find health insurance solutions that work for their budget and their people. We'll analyze your current plan, compare level funding options against traditional coverage, and walk you through exactly what compliance requirements you'll face.
No pressure, no gimmicks: just straight talk about what makes sense for your business.
Contact us today for a personalized level funding analysis:
📞 Call: (215) 355-6860
🌐 Visit: totalbenefits.net
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Let's find the health insurance solution that gives you better value, more control, and peace of mind that you're staying compliant in 2026.
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