A self insured health plan may use its own funds to pay employee medical claims directly, instead of purchasing a traditional insurance policy from a carrier. In this arrangement, the employer assumes the financial risk for providing health care benefits. When you visit a doctor, fill a prescription, or receive hospital care, your employer’s funds cover the cost rather than an insurance company’s.
This is the key distinction between self insured (also called self funded) and fully insured health plans. With a fully insured plan, your employer pays a fixed monthly premium to an insurance company, and the insurer takes on the financial risk of paying claims. With a self insured plan, the employer keeps that risk and pays claims as they occur out of its own financial reserves.
Self insured plans cover a significant share of the American workforce. According to KFF’s 2024 Employer Health Benefits Survey, 63% of workers with employer sponsored health insurance are enrolled in plans that are at least partially self funded. Among large companies (200 or more employees), that number reaches 79%. If you receive health insurance through your job, especially at a large company, there is a strong chance your employer self funds your plan.
From your perspective as an employee, a self insured plan often looks and feels identical to a traditional insurance plan. You still receive an insurance card, use a provider network, pay copays and deductibles, and submit claims the same way. The difference happens behind the scenes in how the money flows and who carries the financial risk.
Most self insured employers hire a third party administrator (TPA) to handle daily operations like processing claims, managing the provider network, and issuing ID cards. The TPA is often a well known insurance company like Cigna, UnitedHealthcare, or Blue Cross Blue Shield. So your insurance card might display a familiar insurer’s name, even though your employer technically pays your claims from its own funds.
What Does "Self Insured" Mean in Health Insurance?
A self insured health plan is a benefits arrangement where the employer takes on the direct financial responsibility for paying employees’ medical claims. Instead of buying a group insurance policy and paying premiums to an insurance carrier, the employer sets aside its own money (and collects contributions from employees through payroll deductions) to fund health care costs.
Here is how Healthcare.gov defines it: A self insured plan is a type of plan usually present in larger companies where the employer itself collects premiums from enrollees and takes on the responsibility of paying employees’ and dependents’ medical claims.
The employer typically creates a trust fund or dedicated account to hold these funds. Employee payroll deductions for health coverage go into this account, along with employer contributions. When an employee receives medical care, the claim gets paid from this pool of money.
Once funds enter the health plan trust, they belong to the plan and cannot be redirected back to the employer for other business purposes. This protection exists under ERISA (the Employee Retirement Income Security Act), which governs most employer sponsored benefit plans.
How Does a Self Insured Plan Actually Work?
The mechanics of a self insured plan involve several moving parts. Here is the step by step process:
- The employer designs the plan. The employer decides what benefits the plan will cover, including deductibles, copays, coinsurance, prescription drug coverage, and network requirements. Self insured employers have significant flexibility to customize their plans because most state insurance mandates do not apply to them (ERISA preempts state regulation for these plans).
- The employer sets aside funds. The company establishes a reserve or trust fund and makes regular contributions to cover anticipated claims. Employees also contribute through payroll deductions, just like they would with a traditional plan.
- A third party administrator handles operations. Most self insured employers contract with a TPA to process claims, manage the provider network, handle customer service, and provide insurance ID cards. The TPA administers the plan but does not assume financial risk.
- Claims get paid from the employer’s funds. When you visit a doctor or hospital, the provider submits a claim. The TPA processes it according to the plan’s rules, and payment comes from the employer’s dedicated health plan funds.
5. Stop loss insurance protects against catastrophic costs. To guard against unexpectedly high claims (like a single employee needing $500,000 in cancer treatment), most self insured employers purchase stop loss insurance. This coverage reimburses the employer when individual claims or total plan claims exceed a predetermined threshold.
Self Insured vs. Fully Insured: What Is the Difference?
Understanding the difference between these two plan types helps you know who actually pays for your health care and what protections apply.
Feature | Self Insured Plan | Fully Insured Plan |
Who pays claims | The employer, from its own funds | The insurance company |
Financial risk | Employer assumes the risk | Insurance carrier assumes the risk |
Monthly costs | Employer pays claims as they occur (variable) | Employer pays fixed premiums (predictable) |
Plan customization | High flexibility in benefit design | Limited to carrier’s plan options |
Regulation | Primarily federal (ERISA) | State and federal insurance laws |
State benefit mandates | Generally do not apply | Apply in full |
Premium taxes | Exempt from state premium taxes (2% to 3% savings) | Subject to state premium taxes |
Claims administration | TPA or in house | Insurance carrier |
Stop loss insurance | Usually purchased separately | Not needed (risk transferred to carrier) |
Best suited for | Large employers (200+ employees) | Small to midsize employers |
Employee experience | Looks the same as a traditional plan | Standard insurance experience |
Key Regulatory Differences
One of the most important differences affects you directly. Self insured plans are regulated primarily under federal law (ERISA), not state insurance law. This means:
State mandated benefits (like requirements to cover specific treatments, procedures, or providers) generally do not apply to self insured plans. The employer has more freedom to design benefits but also fewer state consumer protections.
However, self insured plans must comply with several key federal laws: the Affordable Care Act (ACA) provisions on preventive care, dependent coverage until age 26, and essential health benefits for certain plans; COBRA continuation coverage rules; HIPAA privacy and portability protections; and the No Surprises Act protecting against surprise out of network billing.
Why Do Employers Choose to Self Insure?
Employers self insure their health plans for several practical and financial reasons:
Cost savings. When claims are lower than expected, the employer keeps the savings instead of paying fixed premiums to an insurer that would pocket the difference. Self insured employers also avoid paying the insurance carrier’s profit margin and state premium taxes (typically 2% to 3% of premium value).
Cash flow advantages. Instead of paying large premiums upfront each month, self insured employers pay claims as they occur. In months with lower claims activity, cash stays in the company’s accounts and can earn interest.
Plan customization. Self insured employers can design benefits that match their workforce’s specific needs. They can adjust deductibles, add wellness programs, include or exclude specific services, and build unique provider networks without being limited to a carrier’s standard plan offerings.
Access to claims data. Self insured employers receive detailed data about how their employees use health care. This information helps them identify trends, manage costs, target wellness initiatives, and make informed decisions about plan design.
Avoiding state mandates. Because ERISA preempts state insurance regulation for self insured plans, employers can offer consistent benefits across all states where they operate without navigating different state mandate requirements.
What Are the Risks of Self Insured Plans?
Self insuring also carries risks that employers and employees should understand:
Financial exposure. If employees experience an unusual number of high cost claims in a given year, the employer must cover those costs. A cluster of expensive treatments (transplants, cancer care, premature births) can strain the employer’s finances.
Stop loss gaps. While stop loss insurance protects against catastrophic claims, it does not cover every dollar. The employer still pays all claims up to the stop loss attachment point, which can range from $50,000 to $250,000 or more per individual claim.
Administrative complexity. Self insured employers take on responsibility for plan compliance, ERISA fiduciary duties, claims disputes, and regulatory reporting. Even with a TPA handling day to day operations, the employer retains legal responsibility.
Employee impact if the employer faces financial trouble. If a self insured employer experiences serious financial difficulties, the health plan’s ability to pay claims could be affected. Unlike fully insured plans where the insurance carrier must pay regardless of the employer’s financial health, self insured plan payments depend on the employer’s financial stability.
How Does Self Insurance Affect You as an Employee?
For most employees, the daily experience of using a self insured plan feels identical to using a fully insured plan. You still:
Receive an insurance ID card (often with a major insurer’s name on it). Use a provider network with in network and out of network options. Pay premiums through payroll deductions. Meet deductibles, pay copays, and share costs through coinsurance. Submit claims the same way you would with any health plan. Access customer service through the TPA.
Where You Might Notice Differences
Benefit design. Your employer has more flexibility to design unique benefits. This could work in your favor (more generous coverage in areas your employer prioritizes) or against you (coverage gaps for services that state mandates would require under a fully insured plan).
State consumer protections. Certain state insurance protections may not apply to your plan. For example, if your state mandates coverage for a specific treatment or provider type, a self insured plan may not be required to include that benefit.
Appeals process. If you dispute a claim denial, the appeals process follows ERISA guidelines rather than state insurance department procedures. Your rights to appeal are protected under federal law, but the process differs from state regulated plans.
Real Life Scenario: Self Insured Plan in Action
Carlos works for a large manufacturing company with 2,000 employees. His employer self funds the health plan and uses Blue Cross Blue Shield as the TPA. Carlos’s insurance card says “Blue Cross Blue Shield” on the front, and he uses BCBS’s provider network.
When Carlos visits his doctor for a knee injury, the doctor submits a claim to BCBS. The TPA processes the claim according to the plan rules and pays the provider from the employer’s dedicated health plan trust fund. Carlos pays his $30 copay at the visit. He never interacts with the employer’s finances directly. From his perspective, the experience is indistinguishable from a traditional insurance plan.
However, when Carlos’s coworker Lisa needs an expensive specialty treatment that the state requires fully insured plans to cover, she discovers that the self insured plan does not include that benefit. The employer designed the plan without that specific state mandated service because ERISA exempts them from the state requirement.
Who Uses Self Insured Health Plans?
Self insured plans are most common among:
Large employers. About 79% of covered workers at large firms (200+ employees) are in self insured plans. Large companies have the financial reserves and employee population size to absorb claims variability.
Fortune 500 companies. Nearly all of the largest U.S. corporations self fund their health plans.
Midsize employers. Companies with 100 to 500 employees increasingly adopt self insured plans, often paired with stop loss insurance.
Government entities. Many state and local governments self insure their employee health plans.
Unions and associations. Some unions and professional associations sponsor self insured health plans for their members.
Growing small businesses. While less common, some employers with as few as 25 to 50 employees operate self insured plans, especially with level funded arrangements that combine self insurance with fixed cost protections.
What Is Level Funded Insurance?
Level funded plans represent a middle ground between fully insured and self insured. The employer pays a fixed monthly amount that covers expected claims, administrative fees, and stop loss insurance. If actual claims come in below expectations, the employer may receive a refund. If claims exceed expectations, stop loss insurance covers the excess. According to KFF’s 2025 survey, 37% of covered workers at firms with 10 to 199 employees are in level funded plans.
Frequently Asked Questions
Check your Summary Plan Description (SPD), which your employer must provide. It will state whether the plan is self funded or fully insured. You can also ask your HR department or benefits administrator directly. If your plan is administered by a TPA but funded by your employer, it is self insured.
In many cases, yes. Self insured plans can mirror the coverage of fully insured plans, including doctor visits, hospital stays, prescriptions, preventive care, and specialist appointments. However, because state benefit mandates may not apply, some specific services that fully insured plans must cover might be excluded from a self insured plan.
Yes, partially. Self insured plans must comply with several ACA provisions, including covering preventive services without cost sharing, allowing dependents to stay on the plan until age 26, eliminating annual and lifetime dollar limits on essential benefits, and following the No Surprises Act. However, they are exempt from state level ACA requirements and benefit mandates.
Yes. ERISA provides a formal appeals process for self insured plans. You have the right to file an internal appeal with the plan administrator. If the internal appeal is denied, you may have additional options under ERISA or through the Department of Labor. The process differs from state insurance department appeals that apply to fully insured plans.
If a self insured employer ceases operations, the health plan typically terminates. You would lose coverage and qualify for a special enrollment period to obtain new coverage through the ACA marketplace, COBRA (if available), or another source. Unlike fully insured plans where the insurance carrier guarantees payment, a self insured plan’s ability to pay claims depends on the employer’s financial resources.
Neither is inherently better or worse. Self insured plans can offer more customized benefits and sometimes richer coverage because employers save on insurance company profit margins and taxes. However, employees may lose certain state mandated protections. The quality of your coverage depends on how your specific employer designs and funds the plan.
Key Takeaways
A self insured health plan uses the employer’s own funds to pay employee medical claims directly, rather than purchasing traditional insurance from a carrier. About 63% of workers with employer coverage are in self funded plans, and that number rises to 79% at large firms. As an employee, your daily experience with a self insured plan typically feels identical to a fully insured plan, but behind the scenes, the financial structure and regulatory framework differ significantly.
The most important things to understand: your employer assumes the financial risk, federal law (ERISA) primarily governs the plan, state benefit mandates generally do not apply, and a TPA usually handles claims and administration. Always review your Summary Plan Description and ask your HR team questions about your specific coverage.
If you want to compare health insurance options or explore different types of coverage, Alias Insurance provides free quotes from leading providers across the United States. Their comparison tools help you understand plan types, costs, and coverage details so you can make informed decisions about your health care.
Health plan structures, benefits, and regulations vary by employer, plan design, and applicable federal and state laws. The information in this article reflects general principles and should not replace advice from your employer’s benefits administrator or a licensed insurance professional. For marketplace plan options, visit Healthcare.gov.
