Short answer: In a self-funded plan, the employer pays employees’ medical claims directly out of its own funds, usually with a third-party administrator (TPA) to process claims and stop-loss insurance to cap catastrophic risk, instead of paying fixed premiums to an insurer.
With self-funding, the employer, not an insurance carrier, takes on the financial risk for employees’ claims. The employer typically hires a third-party administrator (TPA) (or an insurer’s administrative-services-only arm) to process claims and run the network, and buys stop-loss insurance to cap catastrophic exposure.
Self-funded plans are governed primarily by federal ERISA, which preempts most state-mandated benefits and state premium taxes. That gives the employer more control over plan design, access to its own claims data, and any savings in a low-claims year, but also more risk, more administrative responsibility, and fiduciary duties.
A level-funded arrangement is a packaged version of self-funding designed to feel like a fully insured plan, which has made self-funding practical for much smaller employers than in the past.