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Cost of employer-sponsored health insurance

Written by: Elizabeth Walker
November 22, 2021 at 10:05 AM

Whether you’re exploring cost-effective health plans for your organization or researching health reimbursement arrangements (HRAs) for the first time, a common question business owners have is, “How much does health insurance cost per employee?”

Rising healthcare costs can make businesses second-guess offering an employer-sponsored health plan. However, the cost of lost productivity can surpass the cost of supporting employees’ well-being, so offering a comprehensive health benefit is vital.

In this article, we’ll break down the average cost of health insurance per employee as well as the average cost of employer-provided group health insurance. We’ll also explain how you can use an HRA to further control your budget.

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How much does group health insurance cost?

When an employer provides health insurance coverage to employees, the business purchases a plan (or plans) to cover all eligible employees and dependents. This type of coverage is commonly called a “group health insurance plan” or a “fully-insured plan.”

According to the Kaiser Family Foundation (KFF), in 2021, the average cost of employee health insurance premiums for family coverage increased by 4% from the previous year to $22,221. The average annual premiums for an individual’s plan also increased 4% to $7,739 this year.

Many employers also changed their cost offerings on telemedicine, mental health coverage, and wellness programs this year. Although these numbers vary by company and provider, the average insurance costs continue to rise year over year.

How much do employers pay for health insurance?

If you’re an employer offering health benefits for the first time, allocating a part of your budget to pay for a health benefit is fundamental, not only to retain talent, but also attract new employees.

KFF found that in 2021, the average health insurance cost for employers was $16,253 annually, or 73% of the premium, to cover a family and $6,440, or 83% of the premium for an individual. These premiums for both families and individuals have increased 22% over the last five years and 47% over the last ten years.

Average Annual Worker and Employer Premium Contributions for Single and Family Coverage, by Plan Type, 2021

Learn more about what percentage of health insurance is paid by employers

How much does group health insurance cost for employees?

From the insurance plan your company chooses, to your employees’ health conditions, many factors affect how much employees pay for health insurance.

Again looking at KFF’s report, in 2021, group health insurance participation cost employees $5,969 annually, roughly 27% of the premium, for family coverage and $1,299, about 17%, for an individual. Employee costs are typically taken through a payroll deduction.

Premium costs with a group health insurance plan typically increase every year. In fact, employers expect the average total cost of healthcare to increase 4.7% in 2021. To minimize or reduce fluctuation in premium amounts, and to control the cost of benefits from year to year, a few options are to change contribution strategies or plan features.

How you can control group health insurance costs

Although healthcare is considered one of the most expensive benefits you can offer at your organization, it’s undoubtedly an important investment in your company’s future.

By better understanding what factors will affect your health benefits costs, you can gain greater control over your budget and set your employees up for success.

The cost of providing health insurance to employees depends on the following factors:

  • The insurance carrier
  • The type of plan you choose, such as a preferred provider organization (PPO) or health maintenance organization (HMO)
  • The network of providers in a plan
  • Plan features such as deductibles, copays, out-of-pocket maximums
  • Your location
  • Your contribution amount (you can move more of the cost burden onto your employees)
  • The demographics of your employees or your plan rates for the “risk pool” at your company
    • For example, older workforces tend to have higher healthcare costs, which might increase your rates

Health reimbursement arrangements (HRAs) are an effective way to control costs

Instead of purchasing a group health insurance policy and paying premiums set by the insurance company, an alternative strategy is to use an HRA to reimburse employees for premiums and out-of-pocket medical expenses.

Options such as a qualified small employer HRA (QSEHRA) or individual coverage HRA (ICHRA) are a simple and inexpensive solution that works for any small business, regardless of company’s size or budget.

There is also the option of providing a group coverage HRA (GCHRA) to help bridge the gap between offering a traditional group plan while minimizing premium costs.

With an HRA:

  • The employer sets an annual or monthly allowance they will agree to reimburse employees for medical costs
  • Employees purchase their own health insurance plan on a private exchange or the health insurance marketplace
  • Employees are able to choose a plan from a provider of their choice that has the features they need most
  • As employees pay premiums and associated medical costs, the employer reimburses the employee for eligible expenses up to their allowance balance

For example, a young employee might opt for a high deductible health plan (HDHP) to eliminate or minimize out-of-pocket spending on premiums, while an older employee might choose a plan with a lower deductible and maximum out-of-pocket maximum.

The cost savings from providing an HRA are significant. The employer is in control of the allowance they decide to offer, making the true cost the reimbursement amount truly affordable and customizable.

What’s more, the money goes further, as all reimbursements are free of payroll taxes for both the employer and employee and free of income taxes for the employee, as long as they purchase a health plan that qualifies as minimum essential coverage (MEC).

Take our HRA quiz to help you determine which HRA is best for your company

Conclusion

Employees today expect employers to offer a health benefit, but many organizations find group health insurance a pricey investment. While there are a few ways to reduce employer health insurance costs, an HRA gives employers a health benefit option that puts them in control of their costs.

Employers sometimes prefer an HRA because it provides more flexibility for their budget and their employees get to purchase their own insurance plan—one that meets their current life needs.

If you think that an HRA is right for your organization, schedule a call with a personalized benefits advisor at PeopleKeep to learn more.

This post was originally published October 7, 2020. It was last updated November 22, 2021.

Topics: Health Reimbursement Arrangement, Small Business, Health Insurance, Healthcare Costs

Additional Resources

New to HRAs? Learn which is best for you in our comparison chart.
See what you can expect to pay for health insurance in your state.

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