The regulations and restrictions surrounding traditional group health insurance plans can make it frustrating for small and midsize business owners (SMBs) to find a plan that works for their employees—especially if the plan has minimum contribution requirements.
With the cost of health insurance becoming more expensive each year, employers are required to contribute increasingly higher amounts to meet their plan’s contribution requirement. This means SMBs with tighter budgets may not have the money to fully contribute to a group health insurance plan. In this article, we’ll look closely at employer contribution requirements and explore how health reimbursement arrangements (HRAs) and health stipends can help SMBs offer a quality benefit on a budget to cover their employees’ medical costs.
What is group health insurance?
Before we get into the average employer contribution requirements, let’s briefly review group health insurance. Group health insurance, or employer-sponsored health insurance, is an insurance plan offered to eligible employees by an employer. They typically require employers to meet a participation rate of around 70% to be able to provide coverage.
As the most common form of health insurance today, group health plans enable their members to lower their healthcare costs by spreading risk across the group. These plans come with deductibles and out-of-pocket maximum amounts. Additionally, to maintain health insurance coverage, employees pay their portion of the monthly premium costs through a pre-tax paycheck deduction.
Group health plans are popular because employees typically already know how they work, they provide certain tax benefits, and they are accessible to most employers. However, the cost of health insurance can be unaffordable for small business owners, and group plans may be too rigid to support every employee’s healthcare needs.
What is the employer contribution requirement for group health plans?
Most health insurance companies place a minimum contribution requirement on traditional group health insurance policies to protect the insurer from increased risk.
If an employer covers a significant portion of a premium, employees are likelier to enroll in health insurance coverage, allowing for a more diverse risk pool.
In addition, this requirement prevents “adverse selection,” which occurs when only those with chronic conditions and illnesses sign up for coverage. Having an even ratio of healthy to sick people creates a more stable risk environment for health insurance companies.
What are the minimum contribution requirements for group health plans?
Most insurance companies require that employers cover at least 50% of their employees’ monthly premiums, but many employers pay much more than that.
According to the Kaiser Family Foundation, covered workers contribute1 an average of 17% of the premium for single coverage and 28% of the premium for family coverage. That leaves the remaining 83% of single coverage and 72% of family coverage for the employer to pay.
The Small Business Health Care Tax Credit2 helps small business owners get a discount on their employees’ annual premiums. However, even that comes with a 50% minimum contribution requirement to qualify.
Alternative benefit options to group health insurance
If you can meet the minimum contribution requirements for employer-sponsored health insurance plans, you’re all set to offer that type of health benefit. But if you don’t meet the requirements or don’t want to be stuck with a minimum contribution requirement, the alternative options below will allow you to provide substantial coverage to employees.
If you’re wary of the minimum contribution requirements that come with traditional group health insurance plans, an HRA is a great option that comes with no minimum employer contribution requirements.
An HRA isn’t a health insurance plan. With an HRA, you choose a monthly allowance of tax-free money to offer your employees to spend on individual health insurance premiums and more than 200 qualifying medical expenses. Unlike health savings accounts (HSAs), any unused allowance at the end of the year stays with you.
If you choose to offer the qualified small employer HRA (QSEHRA), there are maximum contribution requirements that cap your annual allowance amount. However, QSEHRAs are great for small businesses because they’re specifically designed for employers with fewer than 50 full-time equivalent employees (FTEs). They’re budget-friendly and flexible enough to meet your and your employees’ needs.
If you want to offer more than the QSEHRA limits allow, you can offer an individual coverage HRA (ICHRA). ICHRAs have no maximum contribution requirements and work for employers of any size.
If you want even more flexibility to cover your employees’ medical expenses, you can go with a health stipend. A health stipend is extra money added to an employee’s paycheck used to pay for health insurance premiums and other out-of-pocket costs. With a stipend, there’s no minimum or maximum limit that you can contribute to your employees.
You can give your employees their stipend upfront on a monthly or annual basis or provide reimbursements. With the reimbursement method, employees are typically reimbursed via paycheck when they incur medical expenses.
However, a stipend won’t work as an alternative solution for organizations with 50 or more FTEs, which are required to offer a formal health benefit. Additionally, while you may want your employees to spend their stipend on medical care, you can’t require them to or ask them to submit proof that they purchased health plan coverage.
Employees are technically allowed to spend the money on whatever they choose. Therefore, stipends don’t satisfy the Affordable Care Act’s employer mandate. If you have 50 or more FTEs, you’ll need to offer an ICHRA or group health insurance plan.
Stipend money is also taxable for employees, and employers are subject to payroll taxes on the reimbursements.
Because they’re less regulated than other health insurance benefits, stipends offer increased flexibility. For example, you can offer them in addition to other employer-sponsored health benefits, like HRAs, and all employees, including 1099 contractors and international employees, are eligible to participate.
Simply put, if you want an easy way to meet all your employees' healthcare needs with no employer contribution requirements, a stipend may be the best option for your organization.
While meeting the minimum contribution requirements of group health insurance plans can be challenging for small and midsize business owners, HRAs and stipends come with no such restrictions. These customizable benefits offer greater personalization over traditional health benefits designed to give employees more control over their healthcare.
This article was originally published on January 18, 2017. It was last updated on April 14, 2023.