For decades, traditional group health insurance has been the standard employee benefit offering in the United States. According to KFF1, about 60% of Americans had employer-sponsored health insurance in 2025. That's roughly 165.6 million people who rely on employers to help cover their healthcare costs.
While most Americans are familiar with group health insurance, fewer understand how it works, why it became so widely adopted, and the challenges it can create for employers.
In this article, we’ll explain how group health insurance works and what alternatives may be a better fit for your small business.
In this blog post, you'll learn:
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 since an individual isn't considered a group. Employers often buy group coverage from a health insurance company, through a health insurance broker, or self-fund the benefit with a TPA or insurance carrier. Then, they offer it as part of their employee benefits package.
For large groups, 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. Health insurance carriers offer various coverage options and networks.
Some of the most common types of health insurance networks include:
Organizations can choose to offer an HMO, PPO, EPO, 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 that participants must reach before the plan coverage kicks in.
Employers can also offer self-funded group plans. With this type of plan, employers pay providers directly for covered medical items and services. They often use a TPA or contract with an insurance carrier to manage the plan. While large organizations can save money by self-insuring, it can also create financial challenges. This is because the employer needs to have enough capital to handle employee insurance claims. Employers can use stop-loss policies to reduce their risk, but small and midsize employers may still see rising costs due to employee utilization.
Employers purchase or self-fund group health plans 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.
KFF reports that2 the average yearly premiums for employer-sponsored health insurance in 2025 were $9,325 for single coverage and $26,993 for family coverage. The employer and employees split the cost of insurance premiums.
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 it generally increases annually.
Employer-funded group health plans have 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 was the first health plan in the U.S. in 1798.
Before the 1940s, most Americans paid for their own medical care. However, 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 plans have remained a valuable way for employers to provide health benefits to their workers.
Offering group health insurance is a way to attract and retain talented employees. Since most Americans are familiar with group health plans, and healthcare costs are expensive, they see the value in having employer-sponsored insurance. PeopleKeep’s Employer Benefits Survey found that 92% of employees rated health benefits as somewhat or very important, the highest out of any benefit. 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 on a pre-tax basis. 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.
While group health insurance is a popular benefit, not all organizations have 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:
Applicable large employers (ALEs) that don't offer qualifying coverage to their workers and dependents may face employer-shared responsibility provision (ESRP) penalties.
Employees generally have a limited amount of time to enroll in their employer's group plan as part of the plan's annual open enrollment period. Otherwise, they may need to wait until they qualify for a special enrollment period (SEP).
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.
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:
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.
Group health insurance comes with its drawbacks.
One of the biggest problems with 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 right now, annual rate renewals can be steep for business owners, leading to increased financial burden and stress.
Employers can also offer self-funded health plans. With this model, the employer assumes the financial risk of providing healthcare benefits and pays employee medical claims directly, rather than paying fixed premiums to an insurance carrier.
Self-funded plans can offer greater flexibility in plan design and may reduce costs for some larger organizations. However, they also expose employers to higher financial risk if claims are unexpectedly high.
Most employers use third-party administrators (TPAs) and may purchase stop-loss insurance to help protect against catastrophic claims. While self-funding can provide more control, it also requires significant administrative coordination and financial resources.
Minimum participation rates also pose challenges for small organizations. Insurance providers require a certain percentage of employees to enroll in the group health insurance plan for the organization to offer it. If the organization doesn't meet the minimum requirements, it leaves employees without access to care.
In the modern workplace, it's not unusual for employees to span five generations. With such a range of ages and unique healthcare needs, a one-size-fits-all approach doesn't work.
Group plans have limited flexibility for employees. 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 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.
Many organizations operate multi-state workforces. With the rise of remote work, many workers live outside of an organization's home state. While hiring these workers helps you find talented employees nationwide, it can pose problems when offering a group plan.
State-specific minimum participation requirements and other state regulations can make it difficult to find a policy that works for the entire workforce. This can mean managing multiple health plans at once.
Traditional group medical insurance plans were 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.
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 factors like the metal tier policy type, such as catastrophic, bronze, silver, gold, or platinum insurance plans. It can also vary by network type and carrier.
Individual health insurance plans are often cheaper than small 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 stand-alone health reimbursement arrangement (HRA).
An HRA is an employer-funded health benefit that allows you to reimburse your employees for more than 200 eligible medical expenses, including individual health insurance premiums.
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.
Some examples of HRA-eligible expenses include:
All reimbursements are tax-free for employers and employees. 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.
Two of the most popular stand-alone HRAs are:
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.
HRAs are an affordable and flexible alternative to group health insurance. But administering one can be challenging for small organizations. That's where we can help! Our HRA administration software makes it easy to set up and manage your benefits in minutes each month.
We handle HRA compliance, 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. Plus, your employees can shop for individual health insurance plans and ancillary benefits directly from their dashboards.
If you’re a large or enterprise employer looking to escape rising group health insurance rates, Remodel Health’s ICHRA+ administration platform is likely a better option. You’ll get complete hands-on implementation, support, and compliance guidance from launch through renewal.
While most employers offer group health insurance, it can be 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 health benefits like HRAs to better attract and retain top talent.
This blog article was originally published on July 21, 2023. It was last updated on June 16, 2026.