Minimum contribution requirements: Group health insurance vs. HRAs

The regulations and restrictions surrounding traditional group health insurance can make it frustrating for small and midsize (SMB) employers to find a plan that works for their employees—especially if the plan has minimum contribution requirements.

The average cost of health insurance is becoming more expensive each year. As a result, employers must 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.

Takeaways from this blog post:

• Carriers offering group health insurance policies typically require employers to cover at least 50% of their employees' monthly premiums. They also generally require employers to meet a 70% participation rate.
• HRAs are a great alternative to traditional group health insurance plans as they don’t have minimum employer contribution requirements, though in some cases, there are maximum contribution limits.
• Employers looking for even more flexibility may also consider offering a health stipend. However, stipends are taxable for employees and don’t satisfy the Affordable Care Act’s employer mandate.

What is group health insurance?

Before we get into contribution requirements, let’s briefly define group health insurance. Group health insurance, or employer-sponsored health insurance, is an insurance plan employers offer to their employees. Employers will select and purchase a policy from a broker or insurance carrier and encourage their group of employees to enroll in the policy. This plan type typically requires employers to enroll 70% of the employees they offer the policy to.

As the most common form of health insurance today, traditional group health plans enable plan participants 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’re accessible to most employers. However, the annual premium cost of traditional employer-sponsored insurance can be unaffordable for small employers. It may also be too rigid to support every employee’s healthcare needs.

What is the employer contribution requirement for group health plans?

Most insurers place a minimum contribution requirement on group health insurance policies to protect the insurance company 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 health 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. Many states also require that employers cover at least 50% of their employees’ premium costs. However, this varies by state.

According to KFF, employees covered by a group plan contribute an average of 17% of the cost of a premium for single coverage and 29% of the cost of a premium for family coverage¹. That leaves the remaining 83% for single coverage and 71% for family coverage for the employer to pay.

It’s important to note that minimum contribution requirements aren’t applied to coverage for dependents or spouses—sharing the coverage costs for individuals other than the employee is optional.

The Small Business Health Care Tax Credit helps small employers offering a Small Business Health Options Program (SHOP) plan get a discount on their employees’ annual premiums². However, even that comes with a 50% minimum contribution requirement to qualify.

Alternative benefit options to traditional group health plans

If you can meet the minimum contribution requirements for employer-sponsored health insurance plans, you can offer one. But suppose you don’t meet the requirements or don’t want to be stuck with a minimum contribution requirement. In that case, the alternative options below will allow you to provide your employees with a health benefit.

HRAs

If you’re wary of the minimum contribution requirements or other restrictions that come with traditional group health plans, an HRA is a great option.

An HRA is not health insurance—it’s a formal health benefit that allows employers to cover the cost of employees’ medical expenses, including insurance premiums. With an HRA, you choose a monthly allowance for your employees to spend on individual health insurance premiums and more than 200 qualifying medical expenses. When your employees make an eligible purchase, you reimburse them up to their allowance amount tax-free.

The qualified small employer HRA (QSEHRA) is great for small businesses because it’s specifically for employers with fewer than 50 full-time equivalent employees (FTEs). The IRS sets annual maximum contribution requirements. But there’s no minimum amount you must contribute. This makes QSEHRAs affordable for small employers with a limited budget.

You must offer the QSEHRA to all your full-time W-2 employees, but there's no requirement for them to participate. You can also provide it to your part-time employees; however, it isn’t mandatory. If you choose to do so, HRA compliance laws require you to give your part-time workers the same allowance as your full-time employees.

If you want to offer more than the QSEHRA limits allow or you have 50 or more FTEs, you can offer an individual coverage HRA (ICHRA). ICHRAs have no minimum or maximum contribution requirements and are for employers of any size. They’re especially beneficial if you’re an applicable large employer (ALE) looking to satisfy the employer mandate as long as you meet the affordability standards.

You can vary allowances with an ICHRA based on 11 job-based employee classes. For example, you can contribute more allowance to your salaried employees and less to your hourly workers for extra customization. However, it’s important to note that only employees with a qualifying individual plan, like a Marketplace plan, can participate in an ICHRA.

Health stipends

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 employers add to an employee’s paycheck for them to use to pay for health insurance premiums and other out-of-pocket expenses. 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.

A stipend isn’t considered a formal health benefit and, therefore, won’t work as a solution for organizations with 50 or more FTEs who are required to comply with the Affordable Care Act’s employer mandate. 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 coverage.

Stipend money is also taxable income for employees, and employers must pay payroll taxes on reimbursements.

The fact that health stipends aren’t formalized, regulated health benefits means they can offer increased flexibility. For example, you can offer them in addition to other employer-sponsored health benefits, like HRAs, and all employees, including 1099 independent contractors and international employees, are eligible to participate.

Conclusion

While meeting the minimum contribution requirements of group medical plans can be challenging for SMBs, HRAs and stipends have no such restrictions. These benefits offer greater personalization over traditional health benefits designed to give employees more control over their medical services and other out-of-pocket costs.

Whether you choose an HRA or stipend, you’re sure to have a flexible and customizable solution that can meet your business’s needs and budget.

This article was originally published on January 18, 2017. It was last updated on April 12, 2024.

1. https://www.kff.org/report-section/ehbs-2023-summary-of-findings/
2. https://www.irs.gov/affordable-care-act/employers/small-business-health-care-tax-credit-and-the-shop-marketplace