Operating the Lakewood Avenue Children’s School in Durham, North Carolina, director Marcia Brooks manages a compact team of eight full-time and three part-time staff members while caring for 33 children. Earlier this year, she voiced her desire to provide her employees with a level-funded health plan—a specialized form of health coverage—via the Raleigh News & Observer. Unfortunately, state regulations in North Carolina block her from doing so because her enterprise is deemed too small. Had her school been situated just across state lines in Virginia or South Carolina, securing this option would have been entirely standard.

This dilemma highlights a critical question facing North Carolina legislators, mirroring a broader nationwide controversy. The ongoing friction surrounding these regulations sheds light on larger questions about who finances health care coverage and the ways tax incentives shape these financial outcomes.

How Does Level-Funded Plan Health Care Coverage Work?

From an employer’s perspective, a level-funded health plan functions similarly to conventional employer-sponsored insurance, with one key distinction: it operates on a self-funded model. A portion of each employer contribution flows directly into a dedicated account used to pay out employee medical claims, while another portion purchases stop-loss insurance designed to handle claims exceeding a pre-determined financial threshold.

These mechanisms are deployed extensively nationwide, particularly among compact enterprises. Data from KFF reveals that 37% of covered workers at firms boasting between 10 and 199 employees participated in level-funded structures by 2025.

The primary attraction lies within the financial architecture of these plans. Because level-funded models are self-funded, pricing is determined by the specific group's actual claims history rather than rigid community rating mandates enforced by the Affordable Care Act.

Consequently, organizations employing younger demographic cohorts typically associated with lower medical expenditures—such as restaurant operators, tech startups, and child care facilities—can realize substantial cost reductions.

Furthermore, these arrangements offer potential post-year-end rewards. If actual medical claims fall below projections, the organization may recover a portion of the unused funds at the close of the year, a benefit rarely found in fully insured policies outside of ACA rebates tied to overarching insurer expenditures.

What Do North Carolina’s Laws For Level-Funded Plan Health Care Coverage Say?

North Carolina statutory guidelines center on stop-loss insurance requirements and the minimum employee headcount mandated for eligibility. Current rules dictate that stop-loss coverage marketed to businesses with fewer than 12 eligible workers must strictly adhere to small-group market rating standards. This approach diverges sharply from national norms; industry advocates note that employers with a minimum of five workers can readily secure level-funded alternatives across 43 of the 46 states where these plans are actively commercialized.

In practical terms, this framework functions as an absolute prohibition against level-funded plans for the state's tiniest businesses, a severe limitation amid escalating healthcare overhead.

Meanwhile, November 2024 marked the debut of Carolina HealthWorks, a joint venture launched by the North Carolina Chamber and Blue Cross NC. This self-funded multiple-employer arrangement permits chamber members housing between two and 50 workers to access self-funded insurance pools. Nevertheless, participation necessitates membership dues, prompting scrutiny regarding why organizations must utilize such workarounds instead of procuring direct coverage as is customary in neighboring jurisdictions.

How Does The Tax Code Treat Employer Health Care Coverage?

Federal tax statutes afford generous provisions for employer-provided medical benefits, maintaining neutrality regarding how the underlying plan is financed.

Business owners are legally permitted to write off expenditures dedicated to employee medical protection as standard operational costs, regardless of whether capital is directed toward traditional insurance premiums or a level-funded claims reservoir.

Conversely, pursuant to Section 106, employer-financed coverage remains completely exempt from employee taxable wages, alongside Social Security and Medicare levies. Staff members dodge both income tax and their corresponding 7.65% payroll withholding, while employers likewise bypass their matching 7.65% contribution, yielding considerable fiscal relief. Employee premium shares are frequently deducted on a pre-tax basis as well, ensuring nearly every dollar channeled into an institutional plan evades taxation from both angles.

Boutique firms navigate distinct obstacles. First, entities operating with fewer than 50 full-time equivalent workers can eliminate health benefits altogether without triggering penalties under the ACA employer mandate. Second, leadership structures often face disparate treatment; sole proprietors, partners, and greater-than-2% S corporation shareholders typically channel personal premiums through the self-employed health insurance deduction rather than utilizing the standard employee exclusion.

Although a modest small-business tax credit exists for employee health offerings, its scope remains constrained, and level-funded options are expressly excluded from eligibility.

Two additional financial nuances warrant attention. Year-end claims refunds are generally treated as taxable income because the initial contributions were deducted, and portions corresponding to employee-paid funds may be legally required to remain within the plan structure. On the state level, North Carolina's 1.9% gross insurance premium levy applies to the entirety of a fully insured plan's cost, whereas it is restricted solely to the stop-loss segment of a level-funded alternative.

What Is The National Debate On Health Care Coverage?

When boutique employers abandon health coverage, federal subsidies do not evaporate; instead, financial support shifts from the employer tax exclusion to the ACA premium tax credit, provided the worker qualifies—though fewer individuals met those criteria recently.

Following the expiration of enhanced subsidies at the conclusion of 2025, KFF projections indicated that out-of-pocket premium obligations for subsidized enrollees more than doubled, increasing by upwards of $1,000 annually to preserve identical coverage. Although the House approved a three-year extension via a 230-196 vote in January 2026, the Senate has yet to take definitive action. The subsidy cliff at 400% of the federal poverty level has returned, and provisions within the One Big Beautiful Bill Act stripped away historical caps on repaying excess advance credits for 2026 coverage onward. Consequently, a North Carolina child care educator whose employer cuts benefits in 2026 may struggle to secure affordable alternatives due to lapsed enhanced subsidies and diminished financial buffers.

Despite congressional efforts to address these vulnerabilities, contentious questions persist—such as whether the employer tax exclusion ought to be capped or if small-business employees would find better value within individual insurance exchanges. Yet, for the North Carolina Senate, the core inquiry remains remarkably direct: should local enterprise owners possess the exact same operational freedoms available to commercial peers across state borders?

Would It Benefit States To Reconsider Level-Funded Health Care Coverage?

Synthesizing these moving parts suggests legislative reform may be overdue. Aligning the state threshold down to five workers would harmonize North Carolina with regional peers and national standards. Naturally, lowering this barrier entails certain trade-offs that provoke anxiety among policy analysts.

Detractors contend that if younger, healthier boutique groups exit the community-rated pool, insurance premiums could surge for remaining participants, particularly older or chronically ill demographics. Even so, North Carolina has implicitly tolerated these market dynamics by greenlighting Carolina HealthWorks, which similarly extracts small employee groups into self-funded frameworks.

An appealing prospect for policymakers in Raleigh involves observing these economic shifts in real time. A five-person enterprise operating in Mecklenburg County currently lacks access to financial products readily purchased by a parallel five-person business situated just across the border in York County, South Carolina. Monitoring policy enrollment rates and group insurance premiums on both sides of that geographic divide before and after any legislative update would furnish concrete data regarding whether fears of adverse selection materialize and to what extent.

Ultimately, the ongoing controversy surrounding level-funded structures represents as much of a tax discussion as it does an insurance dispute. Existing federal tax codes subsidize medical coverage identically whether a compact employer selects a fully insured policy or a level-funded vehicle. Therefore, regulatory hurdles like North Carolina’s 12-employee mandate primarily dictate which enterprises can maximize tax-advantaged dollars and which are compelled to abandon employee health benefits entirely.