Level Funding Is Self-funding: 5 Avoidable Contract Risks, With Frank Pennachio

Level-Funded Health Plan Risks: ERISA Contract Traps, Stop-Loss Gaps, and Surplus Fine Print. Episode 533.

An employer with a fully insured plan told Stacey Richter his renewal this year was 69% — his broker negotiated it down to 50%, which she's not sure she'd classify as a victory. Level funding looks like a lifesaver in that spot, but as Frank Pennachio, author of The Silent Danger and a health insurance veteran with nearly 40 years of experience, explains, level funding is self-funding, with all the fiduciary risk that comes with it. Frank walks through five avoidable contract risks that level-funded plan sponsors fall into regularly, from embedded ERISA violations to stop-loss misalignment to surplus fine print.

WHAT YOU'LL LEARN

✅ Why level funding is self-funding — it feels like a fully insured plan because of the flat monthly payment, but the plan sponsor carries the risks and benefits of self-funding, including fiduciary responsibility

✅ How third-party administrator (TPA) and administrative services only (ASO) agreements can embed ERISA violations the moment they're signed, and why ERISA allows personal assets to be exposed

✅ How stop-loss misalignment leaves the plan sponsor on the hook when plan promises, like eligibility for employees on approved leave, aren't reimbursed under the stop-loss contract

✅ The surplus fine print: incurred but not reported (IBNR) factors, service fees Frank has seen as high as 30%, and surplus returned as an invoice credit instead of a check

✅ Why claims data access promised up front can get signed away, and why fiduciaries must pay prudent fees — like a $50,000 charge to reprice one hospital bill

✅ Four action items: never sign a contract as is, educate the plan sponsor team, run a legit RFP, and pick a broker or EBC with experience and financial alignment

WHY THIS MATTERS

With renewals like 69% and 50%, there's a lot of desperation out there for a lifesaver, and level funding is being sold as one. But as Frank Pennachio quotes Thomas Sowell, "There are no solutions, there are only trade-offs," and the goal is for plan sponsors to pick the trade-offs they want rather than desperate ones. The cost increases will sting, Frank says, and they won't likely bankrupt most companies, but the risks you unknowingly assume could.

MENTIONED IN THIS EPISODE