ASO Insurance: A Self-Funded Health Plan

The ins and outs of ASO Insurance. Is it right for you?

As health insurance costs rise, many employers are exploring ASO insurance (Administrative Services Only) and self-funded health plans as alternatives to traditional group coverage. An ASO arrangement allows companies to self-insure health benefits while outsourcing plan administration to a Third-Party Administrator (TPA).

This guide breaks down how ASO insurance works, the role of self-insurance and stop-loss protection, and how it compares to traditional PPOs and HMOs.

What Is ASO Insurance?

An ASO plan combines Self-Insured Health Plans where the employer pays employee medical claims directly from a reserve account, with a TPA that manages:

Payroll deductions and benefit contributions
Claims processing and approvals
Compliance with federal laws like ERISA, ACA, and COBRA
Employee and provider support

Employers typically set up a reserve trust account with 2–7 months of claims on hand. The ASO provider handles administration, ensuring smooth claims management and regulatory compliance.

How Self-Insurance Works

In a self-insured health plan, the employer assumes all financial risk for employee medical claims. Unlike traditional insurance where the carrier pays claims, the employer pays directly from its reserves.

Key Features:

Flexibility in designing custom benefits.
Federal regulation under ERISA (less state-level interference).
Cash-flow advantages, since claims are paid only when incurred.

According to the Self-Insurance Institute of America, over 50 million employees and their families are covered through self-funded health plans.

Stop-Loss Coverage: Protecting Against Catastrophic Claims

The biggest challenge with self-insurance is catastrophic claims (high-cost, unexpected events that exceed normal reserves). Employers typically add stop-loss insurance to limit exposure.

Types of Stop-Loss Coverage:

Specific Stop-Loss – Protects against unusually high costs for a single employee.
Example: A childbirth complication exceeding $150,000 would be reimbursed after the employer pays their $50,000 cap.
Aggregate Stop-Loss – Protects against the total annual claims for all employees exceeding a set ceiling.
Example: If a company’s total annual claims exceed $500,000, aggregate stop-loss reimburses the excess.

Stop-loss adds cost but ensures self-funded plans remain financially sustainable.

Benefits of ASO Insurance

Employers choosing ASO plans often see advantages such as:

Plan Customization – Design benefits tailored to your workforce.
Control of Reserves – Earn interest on trust account balances.
Cash Flow Efficiency – Pay claims as they occur instead of prepaying premiums.
Simplified Compliance – ERISA preemption reduces state-level requirements.
No State Premium Taxes – Save 2–3% normally paid on fully insured plans.
Flexible Provider Networks – Contract with the providers that best serve your employees.

Risks of ASO Insurance

Financial Risk – Employers assume liability for all claims.
Catastrophic Costs – High-cost claims may exceed reserves.
Complex Administration – Requires strong oversight and a capable TPA.

PPOs vs HMOs in Self-Funded & ASO Plans

When structuring your ASO plan, you can still choose traditional PPO or HMO networks for employees:

Preferred Provider Organization (PPO):

Offers more flexibility to see specialists without referrals.
Higher premiums but better out-of-network benefits.
Examples: Anthem, UnitedHealthcare, First Health.

Health Maintenance Organization (HMO):

Lower premiums, but requires a primary care provider referral for specialists.
Limited out-of-network coverage except in emergencies.
Examples: Kaiser Permanente, Aetna HMO.

Key Difference: PPOs provide flexibility and choice, while HMOs focus on cost control and preventive care. Both can be integrated into self-insured or ASO-administered plans.

PEO vs ASO: Which Is Better for Health Plans?

When weighing a PEO (Professional Employer Organization) against an ASO (Administrative Services Only), the choice comes down to how much support you want and how much control you’re comfortable keeping.

PEO: Professional Employer Organization

Employer of Record: The PEO becomes the employer of record, handling payroll taxes, compliance, and liability.
Services: Full-service support, including HR, payroll, employee benefits, compliance, and risk management.
Risk: Liability is shared with the PEO, reducing your direct exposure.
Benefits: Access to pooled group benefits, often at lower costs due to economies of scale.
Cost: Typically charges a percentage of payroll (around 2–6%).

Best for businesses that want a turnkey HR solution, prefer less hands-on management, and want to reduce risk through shared responsibility.

ASO: Administrative Services Only

Employer of Record: You remain the employer of record, keeping full responsibility for compliance and employee management.
Services: Administrative-only support such as payroll processing, benefits administration, and claims management.
Risk: The employer retains all financial risk and compliance responsibility.
Benefits: Freedom to self-fund and customize health plans while choosing provider networks and plan design.
Cost: Usually billed as a flat fee, averaging $600–$1,200 per employee annually.

Best for companies that want more control and flexibility over their benefits, are comfortable assuming risk, and prefer customizable health plan options.

How ASO Helps Small Business Owners

For small and mid-sized businesses, funding employee health benefits comes with strict responsibilities. Employers must remain compliant with both state and federal regulations, maintain proper financial documentation, and keep reserve accounts funded above required levels.

An ASO (Administrative Services Only) provider takes on this administrative burden. The TPA (Third-Party Administrator) ensures that:

Plan reserves are properly monitored and documented
Coverage limits and claim approvals are handled accurately
Employees and providers have support confirming coverage and payments
Compliance standards are met to avoid costly mistakes

This allows business owners to focus on growth rather than learning the complexities of health plan administration.

In contrast, PEOs typically bundle health insurance into pooled group plans, which often makes self-insurance less viable. However, some PEOs may allow flexibility for employers exploring self-funded models, so it’s worth discussing options with a PEO broker before deciding.

Assess Your Small Business Needs to Decide

Every business is different. A small to mid-sized employer seeking affordable health benefits will often benefit most from an ASO, as it provides flexibility and cost control without requiring the company to outsource all HR functions.

On the other hand, if a business wants a turnkey HR solution — payroll, compliance, benefits, and risk management all under one roof — then a PEO may be the more cost-effective choice.

The key is to align the model — ASO vs. PEO — with your company’s growth stage, budget, and administrative capacity.

Making Your Choice About an ASO

Once you’ve determined that a self-funded health insurance plan is the right direction, the next step is choosing the right ASO provider. Cost should not be the only factor.

Expect to pay $600–$1,200 per employee annually for ASO services.
This is significantly less than the 2–6% of payroll fees most PEOs charge.
Remember: ASOs handle administration only, not full HR outsourcing.

Not Sure if ASO Insurance Is Right for Your Business?

Managing a self-funded health plan can feel overwhelming, but you don’t have to navigate it alone. An ASO (Administrative Services Only) provider can simplify compliance, claims management, and employee support — so you stay focused on running your business.

Take our quiz to find out if it’s the right fit.