Understanding Stop-Loss Insurance in Level-Funded Plans — Stop-loss insurance is the financial backstop that keeps a level-funded health plan from being derailed by unpredictable claims. Below, Diversified Insurance Brokers explains how specific and aggregate protection work, what attachment points and lasers really mean, and how to align plan design with eligibility, participation, and documentation so underwriting stays smooth.

What You’ll Learn

• How stop-loss plugs into a level-funded plan and why it matters for small employers
• The difference between specific and aggregate protection—and how attachment points affect premium vs. risk
• How eligibility, participation, and documentation influence underwriting and total cost of coverage

Level-Funded 101: Why Stop-Loss Matters

Level-funded arrangements combine a predictable monthly payment with self-funded mechanics. Your payment generally covers three items: (1) claims funding, (2) fixed administrative costs, and (3) stop-loss premiums. When claims run favorably, some plans return a portion of unused claims funds at year-end; when claims run high, stop-loss helps protect the plan. To see where this model fits inside your broader employer program, review our why group level funding can make sense guide and how it fits within your employer services strategy.

Specific vs. Aggregate Stop-Loss

Specific stop-loss caps your exposure to any one member’s large claim. Once the plan has paid up to the specific attachment point for that person, the stop-loss policy reimburses additional eligible amounts per contract.

Aggregate stop-loss caps exposure to the group’s total annual claims. When cumulative claims exceed the aggregate attachment point, the policy reimburses the excess, subject to contract basis and limits. Choosing attachment points is a tradeoff: lower thresholds raise premium but reduce volatility; higher thresholds lower premium but increase retained risk.

Key Terms (in Plain English)

• Attachment point: The threshold where stop-loss begins reimbursing your plan—separately defined for specific and aggregate coverage.
• Lasers: A higher specific deductible on identified high-risk members. Lasers can lower premium but shift more risk to the plan for those individuals.
• Contract basis (e.g., 12/12, 12/15, 12/18): Defines incurred/paid timing windows that count under the policy. Run-out protection (e.g., 12/15) improves cash flow predictability.
• Reimbursement timing: How quickly the carrier reimburses after a threshold is pierced—critical for smaller employers managing cash flow.

Underwriting Inputs You Can Influence

Underwriters evaluate participation, employer contribution, and census/eligibility stability. Groups with clear rules and documentation get better options. For planning around group size rules and renewals, see creditable coverage by employer size to understand thresholds that may apply in your state.

Workforces that fluctuate—seasonal hiring, variable hours, or contractors—benefit from thoughtful plan timing. If contractors are part of your model, keep level-funded enrollment for eligible W-2s and give contractors a separate path. Our guide on how short-term health insurance can bridge the coverage gap outlines options. If contractor coverage is a strategic priority, start with Can 1099s get group level funding to understand what’s possible without jeopardizing underwriting.

Design Decisions with Practical Tradeoffs

1) Attachment points: Lower specific deductibles cut volatility from one-off shock claims but increase premium. Aggregate points should reflect credible expected claims and seasonality. We model multiple combinations against your budget and risk appetite.

2) Lasers vs. no lasers: Accepting a laser on a known high-risk member can make a quote feasible or more affordable—but it concentrates risk. We’ll show head-to-head projections so you can compare true expected cost.

3) Contract basis & run-out: A 12/12 contract costs less but can expose you to late-arriving claims. A 12/15 or 12/18 adds run-out protection that smooths cash flow at renewal.

4) Cash-flow timing: Even with stop-loss, the plan pays claims first from the claims fund. Faster reimbursements matter if a large claim hits early. Align funding, attachment points, and reimbursement timing to your capital strategy and HR calendar.

Eligibility, Participation, and Documentation

Most carriers limit enrollment to bona fide W-2 employees and require minimum employer premium contributions and participation. If you need to support contractors, handle that alongside (not inside) the level-funded plan with compliant alternatives and clear guidance. For teams still weighing funding approach vs. workforce mix, start with the why group level funding can make sense primer, then map the timing to your employer services strategy.

Examples & Scenarios

Scenario A — Early large claim: A 12-employee group selects a $40,000 specific attachment. One member incurs $110,000 in eligible claims mid-year. The plan funds the first $40,000 for that member; specific stop-loss reimburses the remaining eligible amount, preserving the employer’s annual budget.

Scenario B — Favorable year-end: A 22-employee group maintains strong participation and steady hiring cadence. Claims finish below projections; per plan terms, a portion of unused claims funds is returned at year-end, lowering total cost of coverage.

Related Topics to Explore

• Contact Diversified Insurance Brokers
• High-risk life insurance solutions
• Long-term care insurance guidance

Why Work with Diversified Insurance Brokers

• Access to 75+ A-rated carriers and modern level-funded solutions
• Since 1980 — independent, client-first guidance for employers nationwide
• Advanced case design for complex eligibility and fluctuating workforces
• Fast, personalized quotes and clear next steps for your team