Every year, you write large checks for employee health insurance premiums. You budget for them, you plan around them, and you accept them as a fixed cost of doing business.
But here’s a question most business leaders never think to ask: what happens to that money when your team is healthy and claims are low?
The answer depends entirely on how your plan is structured. And for most small and mid-sized businesses, the answer is simple — the insurance carrier keeps it.
How premiums work in a fully funded plan
In a traditional fully funded plan, you pay a fixed monthly premium to an insurance carrier. That premium is calculated based on your group’s demographics, claims history, and the carrier’s broader risk pool. Built into that number are the carrier’s administrative costs, profit margin, and reserves.
If your team’s actual claims for the year total less than what the carrier collected in premiums, the difference is called surplus. In a fully funded plan, that surplus belongs to the carrier. Period. You don’t see it, you don’t share in it, and most of the time you don’t even know it exists.
Key term — Surplus: The difference between the premiums collected and the actual claims paid out. In fully funded plans, the carrier retains the surplus. In alternative plan structures, some or all of the surplus may be returned to the employer.
Think about that for a moment. You’re essentially placing a bet each year that your team will need a certain amount of healthcare. If the need is less than expected, the house keeps the winnings. If the need is more than expected, the house raises your bet next year.
A concrete example
Let’s say you run a 50-person company. Your annual health insurance premium is $600,000. After the carrier pays out claims and covers administrative costs, the actual spend comes to $480,000.
That leaves $120,000 in surplus.
In a fully funded plan, that $120,000 goes to the carrier. You’ll never see it on a statement. You might get a modest renewal increase instead of a steep one, but you won’t get a check. The carrier collected more than it spent, and it kept the difference.
Now imagine that same scenario under a level-funded plan. Your monthly payments are still predictable. But the plan is structured so that if claims come in under the expected amount, the surplus flows back to you. In this example, you might receive a refund of $80,000 to $100,000, depending on the plan’s specific terms and the stop-loss arrangement.
Same employees. Same health outcomes. Dramatically different financial result for your business.
How surplus works under different plan structures
Let’s look at how each major plan type handles the surplus question.
Fully funded plans. The carrier retains all surplus. You have no visibility into claims versus premiums. Your only indication of how things went is the size of your rate increase at renewal. A lower increase might mean claims were favorable, but you’ll never know the actual numbers.
Level-funded plans. Your fixed monthly payment is divided into claims funding, administrative fees, and stop-loss premiums. If actual claims are lower than the claims funding portion, the surplus is returned to you, often as a lump-sum refund after the plan year closes. You get transparency and participation in the upside.
Key term — Stop-loss insurance: A policy that protects self-funded and level-funded employers from catastrophic claims. It caps the employer’s exposure at a set threshold, both for individual high-cost claims (specific stop-loss) and for total group claims (aggregate stop-loss).
Partially self-funded plans. You fund claims directly, so there’s no middleman holding your surplus. When claims are lower than what you budgeted, the money simply stays in your claims fund. You have full visibility and full control. The savings are yours immediately, not as a refund months later.
ICHRA plans. The surplus concept doesn’t apply in the same way. You set a fixed allowance for each employee, and unused allowance amounts typically stay with the employer. Your cost is exactly what you budgeted. There’s no claims risk and no surplus to recover because you’re not funding claims directly.
Why this matters more than you think
The surplus question isn’t just about one good year. It’s about compounding value over time.
Consider a business that operates a fully funded plan for ten years. Some years claims are high, some years they’re low. Over that decade, the carrier collects surplus in the good years and raises premiums in the bad years. The employer never benefits from the good years but always pays for the bad ones.
Now consider the same business on a level-funded or partially self-funded plan. In the good years, surplus flows back to the business. That money can be reinvested in the company, used to enrich benefits, fund a wellness program, or simply improve the bottom line. In the bad years, stop-loss insurance limits the downside.
Over a decade, the difference can be hundreds of thousands of dollars for a mid-sized company. That’s not theoretical savings from a spreadsheet model. That’s real money that either sits in an insurance carrier’s reserves or comes back to your business.
A second example: the bad year
Fairness matters here, so let’s talk about what happens when claims are high.
Same 50-person company. This year, a few employees have significant health events. Claims total $700,000 against $600,000 in premiums.
In a fully funded plan, the carrier absorbs that $100,000 loss. That’s the trade you made. You paid for certainty, and certainty protected you this year.
In a level-funded plan, your stop-loss insurance covers the excess above the expected claims threshold. You might owe a modest additional amount depending on the plan design, but your exposure is capped. You won’t face a surprise six-figure bill.
In a partially self-funded plan, stop-loss insurance again limits your exposure. The specific stop-loss covers any single high-cost claimant, and the aggregate stop-loss caps your total claims liability for the year.
The point is this: alternative plan structures don’t leave you unprotected in bad years. They simply let you participate in the good ones.
The question you should be asking
When your broker presents renewal numbers each year, most business leaders ask, “Why is it going up?” That’s the right instinct, but it’s the wrong starting point.
The better question is: “How did our claims perform this year, and where did the surplus go?”
If your broker can’t answer that question, it’s probably because the plan structure doesn’t allow it. And that’s a structural problem worth solving.
Understanding where your money goes is not just a financial exercise. It’s a leadership decision. Every dollar of surplus that flows to a carrier instead of back to your business is a dollar that could have been invested in your team, your growth, or your competitive advantage.
What comes next
Now you understand how money flows through different plan structures and why some businesses benefit from healthy teams while others just pay the same premium regardless. The next piece of the puzzle is data.
Specifically, you need to understand what claims data is, why it matters, and what most business leaders are missing because their current plan doesn’t share it. That’s what we cover in the next article.