Traditional group health insurance has been a top employee benefit for many decades. According to the U.S. Census1, 54.3% of Americans had employer-sponsored group health insurance in 2021.
While most Americans are familiar with group health insurance, you may not know how it works or how it has become so popular. Understanding the ins and outs of group health insurance is particularly critical for employers looking to provide health benefits to their employees.
This article will explain what group health insurance is, how it works, and what alternatives are available for organizations looking to save time and money on their health benefits.
What is a group health insurance plan?
A group health insurance plan is a form of health insurance provided to a group of people, usually employees of an organization. Individuals don’t purchase their own group coverage, as an individual isn’t considered a group. Employers often offer group health insurance coverage as part of their employee benefits package.
In some cases, group health insurance members can access less costly monthly insurance premiums because the risk of insuring those members is spread across the entire group (for example, all of an organization’s workers).
There isn’t just one type of group health insurance plan. Various coverage options are available from health insurance carriers.
Some of the most common types of health insurance include:
- Health maintenance organization (HMO): An HMO is an insurance plan where policyholders must choose a primary care physician (PCP) for their healthcare needs. Policyholders and their dependents must get a referral from their PCP to see a specialist.
- Preferred provider organization (PPO): A PPO provides policyholders with a network of preferred healthcare providers and specialists (known as in-network care). PPO members can seek care outside their network, but often at a much higher out-of-pocket cost.
- Point of service (POS): A POS plan is essentially a combination of an HMO and a PPO. Members must choose a PCP but can also choose to get care outside of their network.
Organizations can choose to offer an HMO, PPO, or POS plan as a high-deductible health plan (HDHP) to save money on monthly premiums. But, this type of plan comes with higher deductibles participants must reach before the plan coverage kicks in.
How group health insurance works
Employers purchase group health insurance policies and offer coverage to their employees and dependents. Once an employer selects a plan, employees can opt in or out of coverage. However, most plans require at least 70% of workers to participate.
Insurance premiums are split between the employer and participants. According to KFF2, on average, employers covered 83% of their employees’ self-only insurance premiums and 72% of employees’ family insurance premiums in 2022.
Employers negotiate with insurers and brokers to select medical plans that best fit the needs of their workforce and their organization’s budget. The cost of group health insurance varies, but costs generally increase annually.
History of group health insurance
Group health insurance has a long history that dates back to the early 20th century. According to a report published by the Bureau of Labor Statistics3, the U.S. Marine Hospital Services in 1798 was the first health plan in the U.S.
Before the 1940s, most Americans paid for their own medical care. But after the federal government implemented wage controls during World War II to avoid inflation, the War Labor Board exempted employer-paid health benefits. This tax advantage drove demand for group insurance.
While regulatory changes have impacted employer-sponsored health benefits, such as the introduction of the Employee Retirement Income Security Act (ERISA) in 1974 and the Affordable Care Act (ACA) in 2010, group health insurance has remained a valuable way for employers to provide health benefits to their workers.
Why do employers offer group health insurance?
Offering group health insurance is a way to attract and retain talented employees. Since most Americans are familiar with group plans, they see the value in having employer-sponsored insurance. A group plan can help improve employee satisfaction and engagement because it provides the healthcare services your workers need.
There are also tax benefits for employers and employees. Employer contributions toward premiums are tax-deductible, while employee contributions are often taken pre-tax. This reduces your employees’ tax liability.
Depending on the size of your organization, you may also be legally required to offer health coverage to your workers.
Are organizations required to offer group health insurance?
While group health insurance is a popular benefit, not all organizations are obligated to offer it. However, under the Affordable Care Act’s (ACA) employer mandate, all organizations with 50 or more full-time equivalent employees (FTEs) must provide qualifying health insurance to at least 95% of their full-time employees. This coverage must include minimum essential coverage (MEC), be affordable, and provide minimum value (MV).
How do employees enroll in group health insurance?
Employees generally have a limited amount of time to enroll in their employer’s group plan as part of a special enrollment period (SEP). Otherwise, they may need to wait until open enrollment to opt in.
Individuals can only enroll in a group plan if their employer offers it or if they belong to certain membership organizations that offer insurance to their members (such as AARP). Otherwise, individuals will need to purchase an individual health insurance policy if they want coverage for the year.
Benefits of group health insurance plans
Group medical plans offer many benefits to employers and employees. Group plans provide comprehensive medical coverage to employees at a relatively low cost to members. Employers can help protect their employees from unexpected medical costs and life changes by offering a group plan.
Group health insurance often covers preventive care, hospitalizations, prescription drugs, and more.
Since most Americans have an employer-sponsored group plan, employees are also more familiar with them than other health benefits options. This means employers and human resources departments don’t need to spend as much time educating employees about how to use their benefits.
Drawbacks of group health insurance
Group health insurance comes with its drawbacks.
Many businesses can’t afford it
One of the biggest problems of offering group coverage is the cost. Group health insurance premiums can be expensive, especially for small businesses and nonprofits.
When you run a small or medium-sized business, you tend to have a smaller workforce and a more limited budget. If you can’t afford group coverage, you might consider not offering a health benefit. This can make hiring and retaining top talent more challenging. That’s why more affordable alternatives exist for small businesses.
Even if you could afford to offer group coverage, annual rate renewals can be steep for business owners, leading to increased financial burden and stress.
Organizations don’t meet the minimum participation requirements
Minimum participation requirements also pose challenges for small organizations. Insurance providers require a certain percentage of employees to enroll in the group health insurance plan in order for the organization to offer it. If the organization doesn’t meet the minimum requirements, it leaves employees without access to care.
It doesn’t fit everyone’s needs
It’s not unusual for employees to span five generations in the modern workplace. With such a range of ages and unique healthcare needs, a one-size-fits-all approach doesn’t work.
For employees, group plans have limited flexibility. They have little choice over their plan, so it may not cover their preferred doctors and specialists. This can create additional out-of-pocket costs for them.
Employers must carefully consider the costs associated with a group plan before making a decision. Thankfully, many alternatives to group health insurance are available for organizations of all sizes.
Challenges of finding coverage for employees in different states
With the rise of remote work following the COVID-19 pandemic, many workers are located outside of an organization’s home state. While hiring these workers helps you find top employees nationwide, it can pose problems when offering a group plan.
State-specific minimum participation requirements and other state regulations can make finding a policy that works for your entire workforce difficult.
Alternatives to group health insurance coverage
Traditional group medical insurance was the standard option for businesses of all sizes for decades. In recent years, however, many organizations have switched to more flexible alternatives. These alternatives may better suit the needs of your organization and your workers.
One alternative to a traditional group plan is a self-insured plan, also called a self-funded group plan. With this type of health insurance, you assume all the financial risks of providing the benefit to your staff. You pay for each employee’s out-of-pocket expenses instead of paying premiums to a carrier.
Some benefits of offering a self-insured plan include being able to customize the plan to fit your particular needs, having complete control over the benefit, and being exempt from ERISA regulations.
But self-insured plans aren’t feasible for most small businesses. Because organizations self-fund these plans, they must have enough capital to pay their employees’ medical expenses. They also require much more administrative work than other options.
Individual health insurance
Before we introduce the other alternatives, let’s discuss individual health insurance coverage. These plans are available for individuals and families to purchase on the federal Health Insurance Marketplace, state exchanges, and private exchanges.
Marketplace plans offer comprehensive health coverage to individuals and families, including the ten essential health benefits under the ACA. While all marketplace plans have similar coverage, their premium costs differ based on the metal tier policy type—either bronze, silver, gold, or platinum insurance plans.
Individual health insurance plans are often cheaper than group coverage, and employees can purchase these policies themselves. While employers can’t offer this type of coverage, they can reimburse employees for their monthly premiums through a health reimbursement arrangement (HRA).
Health reimbursement arrangements (HRAs)
An HRA is an employer-funded health benefit that allows you to reimburse your employees for their qualifying medical expenses. Depending on the type of HRA you offer, this can include individual insurance premiums and out-of-pocket expenses.
You simply set a monthly allowance for your employees and reimburse their medical expenses up to that amount. Your employees submit proof of their purchases to you for review. Once you approve the expense, you can reimburse employees up to their available allowance. All reimbursements are tax-free for employers. They are also tax-free for employees with minimum essential coverage (MEC).
An HRA allows you to control your monthly benefit costs. Because you set the allowances, you can better budget for your annual expenses. Plus, you won’t face any rate hikes from year to year unless you decide to increase your allowances.
You can administer three types of HRAs with PeopleKeep:
- The qualified small employer HRA (QSEHRA): A QSEHRA is a stand-alone HRA specifically designed for organizations with fewer than 50 full-time equivalent employees (FTEs). They come with maximum annual contribution limits set by the IRS. You must offer a QSEHRA to all full-time employees, but you have the option of determining whether or not to include part-time staff in this benefit.
- The individual coverage HRA (ICHRA): An ICHRA is an excellent option for organizations of all sizes. There are no maximum contribution limits, and you can define eligibility and allowances by employee class. Employees must have individual health insurance coverage to participate.
- The group coverage HRA (GCHRA): Also known as an integrated HRA, a GCHRA allows you to supplement your existing group coverage. You can reimburse your employees who participate in your group plan for out-of-pocket expenses like deductibles, coinsurance, and other items. However, you can’t reimburse employees for premiums.
The final alternative to group health insurance is a health stipend. A stipend is a sum of money you can offer to your employees to help them pay for various expenses. Health stipends are taxable, and you must report them as income on your employees’ W-2s.
While stipends are more flexible than HRAs and group coverage, they aren’t formal benefits. This means you can’t require employees to use their stipends on healthcare items or ask for proof of purchase for a health insurance policy. They also don’t satisfy the ACA’s employer mandate for organizations with 50 or more FTEs.
How PeopleKeep can help you offer alternatives to group medical insurance
HRAs and stipends are affordable and flexible alternatives to group health insurance. But administering these benefits can be challenging for small organizations. That’s where we can help! Our HRA and employee stipend administration software makes it easy to set up and manage your benefits in minutes each month.
We handle HRA compliance and plan documents, and review your employees’ expenses so you can focus on running your business. Our award-winning customer service team is available to help you and your employees with any questions along the way.
While most employers offer group health insurance, it can be extremely expensive and time-consuming to administer. The one-size-fits-all approach to group coverage can also leave your employees with fewer options for the healthcare services they need.
That’s why many organizations are switching to more personalized benefits like HRAs and employee stipends to better attract and retain top talent.