Short answer: In a fully insured plan the employer pays premiums and the insurance carrier bears the claims risk. In a self-funded plan the employer pays claims directly (usually with stop-loss protection and a third-party administrator), taking on more risk in exchange for cash-flow control, claims data, and ERISA preemption of many state insurance mandates.
The core difference is who bears the financial risk for claims.
Fully insured: the employer pays a fixed premium to an insurance carrier, and the carrier takes on the risk: it keeps the profit if claims are low and absorbs the loss if claims are high. Premiums are regulated by the state, which means state-mandated benefits and premium taxes apply. It’s simple and predictable, but the employer gets little claims data and no refund in a good year.
Self-funded: the employer pays employees’ claims out of its own funds, typically hiring a third-party administrator (TPA) to process claims and buying stop-loss insurance to cap catastrophic risk. Self-funded plans are governed primarily by federal ERISA law, which preempts most state insurance mandates and premium taxes, and they give the employer access to claims data and any savings from a low-claims year. The trade-off is more risk, more administrative responsibility, and fiduciary duties.
Between the two sits level-funding, a self-funded design packaged to behave like a fully insured plan (fixed monthly cost, stop-loss, possible refund), which has made self-funding accessible to much smaller employers than in the past.
Sources
- ERISA (U.S. Department of Labor); see the TABA Self-Funded knowledge base for deeper mechanics. Verify specifics before CE use.
Content history
Originally published: June 16, 2026
Last reviewed: June 16, 2026