Is Self-Funded Insurance Good for Employees?

When companies weigh their employee benefits strategy, one of the biggest decisions is how to structure health coverage. Many businesses stick with traditional group health insurance. Others are turning to self-funded health plans, a model that has gained traction in recent years as employers look for more control and cost savings. But what does that mean for the employees who rely on this coverage and is self-funded insurance good for employees? Let’s take a closer look.

What Is a Self-Funded Insurance Plan?

A self-funded (or self-insured) health plan is an arrangement where the employer pays medical claims directly rather than sending fixed monthly premiums to an insurance carrier. Instead of transferring the financial risk to an insurer, the company assumes responsibility for its workers’ healthcare costs.

This model stands in contrast to traditional group health insurance, where the carrier manages claims and employers pay set premiums. Self-funded employers have more flexibility to design benefits that meet the unique needs of their teams. They can decide what to cover, choose networks and incorporate wellness incentives that support workforce health.

Self-funding is not limited to large corporations. Mid-sized and growing companies are increasingly turning to options like level-funded plans, which combine self-insurance with predictable monthly payments. These arrangements often involve administrative services only (ASO) providers who handle claims processing, network contracting and compliance with federal requirements such as Employee Retirement Income Security Act (ERISA).

One detail that matters for employees is how ERISA affects coverage. Because self-funded plans are regulated at the federal level, they are exempt from many state-mandated benefits.
Employers gain flexibility to build benefits that truly fit their teams rather than layering on every state mandate, but it also means some protections that state law guarantees under traditional group insurance may not apply. The responsibility then falls on the employer to design a plan that balances cost control with comprehensive coverage, ensuring employees are not left with unexpected gaps.

How Do Self-Funded Plans Affect Employees?

From an employee’s perspective, a self-funded plan can look and feel much like traditional employer-sponsored insurance. ID cards, provider networks and claims processes are often identical because third-party administrators manage the day-to-day experience.

Where things can differ is in the flexibility of benefits. Self-funded employers may offer broader networks, lower out-of-pocket costs or tailored programs such as mental health support or preventive care options. Employees may also benefit from claims transparency. When employers have visibility into spending, they can make targeted improvements—such as adjusting prescription coverage or promoting cost-effective providers—that ultimately help employees access better care.

Claims transparency also helps employees better understand the cost of their own healthcare choices. Many self-funded plans provide online portals where workers can compare provider pricing or review claims in real time. This visibility not only encourages smarter care decisions but also helps employees feel more engaged in their benefits. When people see where dollars are going, they often feel reassured that their employer is managing costs responsibly.

When managed well, employees may not even realize their plan is self-funded. What matters most is how effectively the employer structures and communicates the benefits.

Pros and Cons of Self-Funded Coverage for Teams

Like any coverage model, self-funding comes with both strengths and potential drawbacks.
On the plus side, employees often gain access to personalized benefits. Because employers are not locked into a one-size-fits-all carrier plan, they can build options around what their workforce actually needs. Lower overall costs are another advantage, since savings from efficient claims management or improved health outcomes can be reinvested into richer benefits. Many self-funded plans also include wellness incentives, such as gym membership reimbursements or preventive care bonuses, which encourage healthier lifestyles.

However, there are risks. If a plan is poorly structured, employees may face fluctuating benefits or limited provider access. The stability of coverage depends heavily on the employer’s financial health and ability to manage claims responsibly.

That’s why stop-loss insurance plays such a key role. Stop-loss policies come in two forms: specific coverage, which protects against a single high-cost claim such as an organ transplant, and aggregate coverage, which caps the total amount of claims an employer pays in a year. These safeguards ensure that catastrophic claims won’t drain a company’s resources or jeopardize employee benefits. For employees, knowing this protection is in place helps build trust and confidence in the plan.

Strong communication from HR is also essential. Without it, employees may misunderstand how their plan works or worry about stability.

Is Self-Funding a Fit for Small Businesses?

A common question is whether self-funded insurance is realistic for smaller employers. The answer depends on financial stability and workforce health. Traditionally, self-funding was reserved for large organizations with predictable claims patterns. But the rise of hybrid options has opened the door for small business coverage.

Level-funded plans, for example, combine the customization of self-funding with the cost predictability of fixed monthly payments. Employers pay a set amount that covers claims funding, administrative costs and stop-loss insurance. If claims are lower than expected, the employer may receive a refund at year’s end. If they’re higher, stop-loss coverage helps offset the risk.

For small businesses with stable cash flow and relatively healthy teams, this model can be a smart middle ground. Selected Benefits offers resources to help companies understand the differences in level-funded vs self-funded insurance, which is an important consideration for employers weighing their options.

In Texas, where healthcare cost control remains a priority for many small and mid-sized employers, these alternatives are becoming more popular. National surveys show more small businesses are adopting level-funded arrangements each year and Texas employers have more carriers offering them compared to some other states. This competitive market gives local businesses more leverage to design plans that truly fit their workforce. For employers new to self-funding, it’s worth asking what is a level-funded health plan and how it compares to traditional models.

What Should Employers Communicate to Their Teams?

Employee confidence in their health coverage hinges on clear communication. If a company adopts a self-funded structure, leadership should be upfront about why they chose it and how it benefits employees.

This starts with onboarding and open enrollment. Employees need to understand how claims are processed, whether their provider networks are changing and what wellness incentives may be available. HR teams should emphasize that self-funded coverage is not a downgrade but a strategic way to deliver better, more cost-effective care.

Effective communication can take many forms. Some companies hold town hall meetings or Q&A sessions where employees can ask about coverage directly. Others issue annual benefits statements that highlight both plan details and the employer’s investment in health benefits. Digital platforms and mobile apps can also make it easier for employees to track claims, find providers and access support. The more proactive the communication, the more confident employees feel about their coverage.

Offering resources such as FAQs, support hotlines or one-on-one benefits counseling can go a long way toward easing concerns. The more transparent the employer is about how the plan works, the more comfortable employees will feel using it.

Weighing the Value of Self-Funded Plans for Your Team

So, is self-funded insurance good for employees? The answer often comes down to execution. When employers design thoughtful plans, implement strong claims management and communicate clearly, employees can enjoy comprehensive coverage with more tailored benefits. The flexibility of self-funding also positions companies to adjust benefits as healthcare needs evolve, supporting long-term satisfaction and retention.

For small companies, self-funding may not always be the right fit, but there are alternatives. Employers exploring small business health insurance plans should also consider how self-funded or level-funded options could complement their benefits strategy. And for those comparing approaches, why smal remains an important question.

Some companies may prefer outsourcing through professional employer organizations, but it’s important to recognize that small business PEO alternatives exist that can provide more direct control over benefits. Others may even pair self-funded strategies with temporary solutions such as choosing short-term health insurance in Texas for seasonal or contract workers.

At the end of the day, the right approach depends on your workforce, your financial outlook and your long-term goals. Selected Benefits has extensive experience helping Texas employers evaluate these factors and implement plans that balance cost savings with employee satisfaction.

Contact us today to learn how self-funded and level-funded health plans fit into your benefits strategy and support the health of your team.