Team levels seem to always be such a sore subject for teams, coaches, CP's and parents. Here are my two cents, for what it's worth.
1 - Any team should compete at the highest level that, for lack of better way of putting it, the weakest person on the team can compete at. That means if you can only do a full team BHS then go L2, regardless if you have a handful of tucks or layouts, what have you. <- this is more common for smaller gyms that have less kids to field teams
2 - Saying you have a Worlds level team that's never won a major competition (Cheersport,NCA or UCA Nationals) but gets an at-large bid to worlds - doesn't mean a whole lot other then you want to say you have a Worlds team when IMO you really don't
3 - I will say I like how new gym is doing it - all teams are set at largest common denominator, if you're lacking you either had to get the skill by the end of the summer or move down. If you progressed all summer you could challenge and move up. All season long the teams work to progress their skills and if as a team they've all progressed they can compete at the higher level choose to do so at the last competition of the season.