If you’re a business owner focused on attracting and retaining talent, you know how important it is to offer a valuable health benefit. Because you may be most familiar with a traditional group health plan, it may be your first choice for your benefit. But in the ever-changing healthcare market, how do you know if it’s the best choice for your organization?
Before deciding, you need to consider the advantages and disadvantages of group health insurance. Depending on the type of health insurance you choose, its specific benefit and plan limitations may not be suitable for your business.
In this article, we’ll discuss employer-based group health insurance, 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 is an insurance plan a company offers to its employees. Traditionally, this has been in the form of group health insurance. A group health plan typically provides coverage to its members (your employees) at a lower cost since the risk to insurers is spread across the group.
Employees enrolled in the plan pay a monthly premium to maintain healthcare coverage, generally as a pre-tax paycheck deduction.
The most common types of group health insurance policies are:
- Health maintenance organization (HMO)
- Preferred provider organization (PPO)
- Exclusive provider organization (EPO)
These types of plans usually have a deductible (employers can choose between a low or high deductible) that employees need to meet before their coinsurance is applied. 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.
All group health insurance plans have varying differences, but they typically share the following characteristics:
- Group health plans generally require a 70% participation rate
- Group members have the choice of enrolling in or declining employer coverage
- Group health premiums are split between the employer and their employees
- Employees can add family members and dependents to group plans at an additional cost
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, minimum essential health insurance coverage or face a tax penalty.
Group health insurance is appealing to these employers due to its accessibility, stability, and ability to meet the mandate. However, some small businesses also offer a group health insurance plan, typically in the form of a small group health plan specifically designed for small employers.
What are the 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.
Group insurance is pretty common, so there’s a good chance that employees have heard of it before. According to the Kaiser Family Foundation (KFF), employer-sponsored health insurance covers almost 159 million Americans1. This familiarity can make it easier to entice employees with a benefit they recognize as valuable.
One particular perk that employees are sure to recognize and appreciate is the cost-sharing of group premiums between the employee and employer.
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. For employees, premiums are paid with pre-tax dollars, which can reduce their tax liability.
Additionally, eligible small businesses may qualify for the small business healthcare tax credit through the federal government.
A significant plus of health insurance benefits is that it boosts morale and aids retention. A PeopleKeep survey found that 82% of employees believe an employer’s benefits package, including health insurance, is an important factor in whether or not they accept a job offer.
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.
What are the cons of group health insurance?
Before you sign up for a group health plan, you’ll want to consider the potential disadvantages, like the two we’ll dive into below.
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.
With these increases, 87% of large employers feel group health insurance costs will become unsustainable within the next decade, leaving many 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.
The lack of control and customization of group health plans doesn’t make it as appealing to many individuals. Some employees may even need supplemental health insurance to compensate for coverage they need that’s not included in their company’s plan, making your health benefit feel less well-rounded.
Alternatives to employer-sponsored group health insurance
As an employer, it’s understandable that you want to take care of your employees. But group health insurance may not be the best way to do it.
An Alegeus survey2 found that 41% of consumers think health coverage shouldn’t be tied to employment. These days, group plans might not be as attractive as you think, especially in diverse and inclusive workforces.
If you want to move away from group health insurance or reduce the cost of offering a health benefit, consider offering an integrated HRA, a stand-alone HRA, or a health insurance stipend. These budget-friendly benefits can help your employees pay for medical care while providing you with flexibility and customization options.
We’ll dive into each option below to help you learn more about how they work and how they can help your employees cover their medical expenses.
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. Employers set monthly allowances and reimburse their employees up to this amount. Many businesses use HRAs instead of group insurance because of the tax advantages, budget control, and greater opportunity for customization.
Stand-alone HRAs aren’t linked to a group health insurance plan. 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 insurance, and primary care provider that best meets their needs.
HRAs can also empower your employees by giving them greater control over their health and creating a more personalized health benefit.
The two most popular HRAs are the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA). QSEHRAs are only for employers with less than 50 FTEs. They have annual contribution limits and can be coordinated with premium tax credits.
An ICHRA, on the other hand, is for employers of all sizes, has no contribution limits, and requires employees to have a qualifying form of individual health insurance.
No matter which you choose, stand-alone HRAs are becoming a more popular option for employers who want a health benefit that is both flexible and cost-effective.
If you’re determined to keep your group health plan, but you 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 integrates with 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 a GCHRA, you can reimburse your employees for their deductibles, coinsurance, copayments, and other qualified medical expenses. However, you can’t reimburse them for their insurance premiums.
Businesses that are looking to save on health benefit costs typically switch to a high deductible health 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.
Also, an employer can establish their own unique rules regarding the benefit’s deductibles, cost-sharing, explanation of benefits, and employee classes. These customizations help employers take greater charge of their budget and boost their group health plan while still providing a quality employee health benefit.
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 also 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 a health insurance policy. A stipend also doesn’t satisfy the employer mandate for ALEs. This often makes an HRA a better option.
Implementing group health insurance as part of your employee benefits package can be the first option employers consider because of their familiarity with group plans. However, group health insurance has its disadvantages, so it's essential to weigh the pros and cons before making a decision.
If you think the cons outweigh the pros for your organization, an HRA or health stipend may be just what you need. Get started with one of these personalized health benefits by scheduling a call with PeopleKeep today!
This article was originally published on January 24, 2020. It was last updated on June 2, 2023.