If you’re an employer focused on attracting and retaining talent or improving employee productivity, you know how important it is to offer a valuable health benefit. You might be most familiar with a traditional group health plan, but in the ever-changing healthcare market, how do you know if it’s the best choice for your organization?
Before deciding, you must consider the advantages and disadvantages of group health insurance. Depending on your chosen type of health insurance, its specific benefits and plan limitations may not suit your business. In this article, we’ll discuss employer-based group health insurance and its pros and cons and walk you through other health benefit options that can work for your organization.
What is Employer-Sponsored Health Insurance?
Employer-sponsored health insurance—also called a group health plan—is a popular form of health insurance that employers offer their employees. A group health plan typically provides coverage to participants at a lower cost since insurers spread risk across the entire group. Individuals can’t purchase their own group coverage, as insurance providers don’t consider an individual a “group.”
Employees enrolled in the plan pay a portion of the monthly premium to maintain healthcare coverage, generally as a pre-tax paycheck deduction, with employers covering the rest.
Common Types of Group Health Insurance Policies
- Health Maintenance Organization (HMO) Plans
- Preferred Provider Organization (PPO) Plans
- Exclusive Provider Organization (EPO) Plans
- Point of Service (POS) Plans
These types of health insurance plans usually have a low or high deductible that employees must meet before their coinsurance kicks in and insurers split the cost of their medical care. Employees must also reach a set out-of-pocket maximum before the insurance company pays 100% of all covered healthcare costs for the rest of the plan year.
Characteristics of Group Health Plans
Group health insurance options have some variances, but they typically share the following characteristics:
Participation Rates
Group health plans generally require a 70% participation rate. This means that a significant portion of your employees need to be enrolled for the plan to be viable.
Premium Cost Splits
The employer and employees split the premium costs of the group plan. This shared cost can make health insurance more affordable for employees.
Inclusion of Family Members
Employees can add family members and dependents to group plans at an additional cost. This provides a comprehensive coverage option for families.
Coverage of Essential Health Benefits
Due to the Affordable Care Act (ACA), insurers can no longer deny coverage or increase premiums for individuals with pre-existing conditions. Most plans must also cover the 10 essential health benefits, like preventive care, mental health services, emergency care, and more.
Employer Mandate for Large Employers
The employer mandate requires all applicable large employers (ALEs), or those with at least 50 full-time equivalent employees (FTEs), to offer their staff affordable health insurance that provides minimum essential coverage (MEC) and minimum value or face a tax penalty. Group health insurance is appealing to these employers due to its familiarity, stability, and ability to meet the mandate.
Pros of Group Health Insurance
There are some advantages to offering group health insurance to your employees. Let’s go over three of the most significant ones below.
Familiarity
Group insurance is pretty common, so there’s a good chance that employees have heard of it before. According to KFF, employer-sponsored health insurance covers almost 153 million Americans. This familiarity can make it easier to entice employees with a benefit they recognize as valuable. One specific perk that employees are sure to recognize and appreciate is the cost-sharing of group premiums between the employee and employer.
Tax Advantages
Another major advantage of group medical coverage is the potential for tax benefits. Money paid toward monthly employee premiums is usually tax-deductible for employers. Employees pay monthly premiums with pre-tax dollars, which can reduce their tax liability. Additionally, eligible small businesses may qualify for the Small Business Health Care Tax Credit through the federal government.
Boosts Retention
A significant plus of health insurance benefits is that it boosts morale and aids retention. Our 2024 Employee Benefits Survey found that 92% of employees believe health benefits are one of the most important benefits employers can offer as part of their compensation package. Employees with health insurance can access preventative medical services that may help them avoid serious health issues in the future. And, if problems occur, a group health insurance policy protects employees from costly financial debt they may incur if they need medical treatment and don’t have insurance.
Cons of Group Health Insurance
Before you sign up for traditional health insurance, like a group plan, you’ll want to consider the potential disadvantages, like the two we’ll dive into below.
Overall Cost
One disadvantage of group health insurance is its cost. The average price of group coverage has increased in recent years, and businesses and employees alike have seen increases in premiums and deductibles. According to KFF, the average annual premium for group health insurance in 2023 was $8,435 for self-only coverage and $23,968 for family coverage. This is up from $7,470 for self-only coverage and $21,342 for family coverage in 2020. With these increases, 98% of small employers feel that offering traditional health insurance will be unsustainable in the next five to 10 years, leaving many small businesses looking for more budget-friendly health benefits, like health reimbursement arrangements (HRAs).
Lack of Flexibility
Group health insurance also lacks the flexibility workers desire. Employees on a group plan might be grateful for a health benefit, but they may feel like they didn’t have another choice. The plan might be an excellent fit for one employee but could offer limited resources for others. Because the employer chooses group insurance, employees don’t have a say in what network they’ll be on, the deductible they’ll need to meet, or the premium they’ll have to pay.
Alternatives to Employer-Sponsored Group Health Insurance
As an employer, it’s important to care for your employees. However, traditional health insurance may not be the best way to do it. An Alegeus survey found that 41% of consumers think having health coverage shouldn’t depend on employment. These days, group plans might not be as attractive as you may think, especially in diverse and inclusive workforces. If you want to move away from group plans or reduce your healthcare costs, consider offering a stand-alone HRA, integrated HRA, or health insurance stipend. These budget-friendly benefits can help your employees pay for medical care while providing you with flexibility and customization options.
Stand-Alone Health Reimbursement Arrangements (HRAs)
An HRA is an employer-funded health benefit designed to reimburse employees tax-free for individual health insurance premiums as well as 200+ out-of-pocket expenses, like prescription drugs, preventive care services, and more. Many businesses use HRAs because of the tax advantages, budget control, and greater opportunity for customization.
With an HRA, employers set a monthly allowance for employees to spend on healthcare services and items. Once an employee incurs a qualified medical expense and their proof of payment is approved, the employer reimburses them up to their maximum allowance amount. Once an employee hits their allowance limit, they can’t exceed it.
Stand-alone HRAs aren’t linked to group health insurance. Instead, employers reimburse employees for the individual health insurance policies they choose rather than choosing a group policy for them. This means your employees can choose the insurer, individual plan, and medical providers that best meet their needs. HRAs can also empower employees by giving them greater control over their health and creating a more personalized health benefit.
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Types of Stand-Alone HRAs: QSEHRA and ICHRA**
- QSEHRA: Qualified small employer HRA for employers with fewer than 50 FTEs. The IRS sets annual maximum contribution limits for the QSEHRA, but they have no minimum contribution limits. Reimbursements are free of payroll tax for the employer and income tax-free for employees. Employees must have health coverage that provides MEC to participate.
- ICHRA: Individual coverage HRA for employers of all sizes. Unlike the QSEHRA, ICHRAs have no minimum or maximum contribution limits. You can customize the ICHRA to vary allowances based on specific employee classes, such as full-time or part-time workers. Employees must have a qualifying form of individual health insurance and attest they have coverage before they can collect reimbursements.
Integrated Health Reimbursement Arrangements (HRAs)
If you’re determined to keep your group health plan but want to save money or enhance your benefits, there is an option for you. An integrated HRA, also known as a group coverage HRA (GCHRA), is a tax-free reimbursement benefit for employers of any size that supplements group health insurance.
Employees must enroll in the employer’s group health plan to participate in a GCHRA—they can’t have an individual plan. With this additional coverage, you can reimburse your employees for their deductibles, coinsurance, copayments, and other qualified medical expenses. However, you can’t reimburse them for their group insurance premiums.
Businesses looking to save on health benefit costs typically switch to a high deductible health insurance plan (HDHP) and layer it with an integrated HRA. In other cases, employers looking to provide a more robust health benefit can stick with their existing group policy and pair it with a GCHRA. Similar to an ICHRA, GCHRAs have no limit on employer allowance contributions.
Health Stipends
Lastly, you can go with a health stipend. With a stipend, an employer offers a fixed amount of money to their employees to help them pay for an individual health insurance plan and other health-related out-of-pocket costs. The amount is typically added to the employees’ paychecks as taxable income on a regular basis, such as monthly, quarterly, or annually. Stipends are flexible, so employers can determine how much to give their employees for medical care without having to foot the bill for restrictive group health insurance. They aren’t a formal benefit, so they’re typically easier to manage and have fewer administrative costs.
However, because they aren’t a formal benefit, employees can use their stipend to buy whatever they want. So, while you may want your employees to use the money on health insurance or medical expenses, they aren’t required to do so, nor can you ask for proof that they purchased health insurance coverage. A stipend also doesn’t satisfy the employer mandate for ALEs. This often makes an HRA a better option.
How to Choose the Best Health Benefit Option
Assessing Employee Needs
Understanding the needs of your employees is crucial. Conduct surveys or hold meetings to gather information on what health benefits are most important to them.
Evaluating Costs
Analyze the costs associated with each health benefit option. Consider both the short-term and long-term financial impacts on your business.
Considering Flexibility and Customization
Look for health benefit options that offer flexibility and customization to meet the diverse needs of your workforce.
Case Studies
Company A: Successful Implementation of QSEHRA
Company A, a small business with fewer than 50 employees, implemented a QSEHRA. This allowed them to provide health benefits without the high costs associated with traditional group health insurance. Employees appreciated the flexibility to choose their own insurance plans.
Company B: Integrating a GCHRA
Company B, a mid-sized business, decided to switch to a high deductible health plan and integrate a GCHRA. This move helped them save on healthcare costs while still providing comprehensive benefits to their employees.
Conclusion
To help your employees with the rising annual cost of healthcare, you may consider implementing group health insurance as part of your employee benefits package. Its familiarity and tax advantages may seem attractive. However, group health insurance has disadvantages, so weighing the pros and cons before deciding is essential.
If the cons outweigh the pros for your organization, an HRA may be just what you need. With PeopleKeep, we can offer you a personalized health benefit that will suit your budget and your employees’ diverse needs.
FAQs
What is the difference between an HRA and a health stipend?
An HRA is a formal health benefit funded by the employer to reimburse employees for qualified medical expenses and individual insurance premiums. A health stipend is a fixed amount given to employees as taxable income to help with medical costs, but it can be used for any purpose.
Can employees choose their own health insurance with an HRA?
Yes, with a stand-alone HRA like QSEHRA or ICHRA, employees can choose their own individual health insurance plan that best fits their needs.
How do tax advantages work with group health insurance?
Employers can deduct the money paid toward employee premiums from their taxes. Employees can pay their premiums with pre-tax dollars, reducing their taxable income.
What are the participation requirements for group health plans?
Group health plans generally require a 70% participation rate, meaning a significant portion of employees need to enroll for the plan to be viable.
Are health stipends considered taxable income?
Yes, health stipends are considered taxable income for employees, unlike HRAs, which provide tax-free reimbursements for qualified medical expenses.