Group Health Insurance: What is it and How Does it Work?
- Lauren Hargrave
- 6 min read
Group health insurance is one of the most important benefits a company can offer. It’s one of the top factors employees consider when they’re considering job offers and it helps to keep your workforce healthy and productive. Beyond these benefits, if you have 50 or more employees, the Affordable Care Act (ACA) requires that you offer your employees a group health plan or a way to purchase one (i.e. an Individual Coverage HRA). If you have fewer than 50 employees, it’s still an important benefit to consider (and could result in additional tax benefits).
In this post, we’ll walk you through what Group Health Insurance is, how it works for both employers and employees and outline some of its many benefits.
A quick definition
In short, a Group Health Plan is a health insurance plan offered to a group of people that share a commonality like being employed by the same company. There are two types of groups that are offered Group Health Insurance: employer-employee groups and affinity groups. Affinity groups include (but aren’t limited to): professional associations, labor unions, fraternity organizations, and customers of the same bank.
To be offered a group health insurance plan from a health insurance company, your group must fall into one of these two categories. That means a group of friends who wish to buy health insurance can’t sign up for a group plan unless they form a professional society, company or some other qualifying group.
The only way individuals can sign up for a Group Health Plan is through a sponsoring company or affinity group. If an individual wants to sign up for health insurance directly, they must purchase a plan from the private marketplace.
Group Health Plans differ in terms of how much they cost, the carrier used, plan type, and more but they share two commonalities:
- Group members can choose to opt-in or out of coverage.
- The sponsoring company or affinity group typically shares the cost of the plan with the individually insured. Some companies and affinity groups will cover 100% of plan premiums in certain circumstances like when individuals choose the more affordable plan option (e.g. a High Deductible Health Plan vs. a more expensive PPO).
- The Group Health Plan will cover spouses and dependents of the insured-individual at an additional cost.
How does it work for employers?
If an employer wishes to offer its employees a Group Health Plan, they can use a benefits broker or research plans themselves. They can choose to offer one health plan or multiple (e.g. an HMO, PPO, and an HDHP), and they can decide how much of the individual Group Health Plan premiums they’ll cover. Typically, health insurance carriers require 70% of the group’s members to elect to join coverage before they’ll issue a health insurance policy, though this can vary. This is different for small employers (those with fewer than 50 employees). Small employers only need one employee or one full-time equivalent to enroll in a Group Health Plan in order to be issued a policy.
Under a Group Health Plan, the sponsoring company or affinity group acts as the master policy holder and negotiates rates and coverage levels on behalf of its employees or members. They also arrange for the delivery of insurance cards and maintain the responsibility for communicating benefits during open enrollment and special enrollment periods.
Once employees and members have elected to join coverage, the sponsoring employer or affinity group is responsible for paying the monthly premiums to keep the coverage active. That means they will collect the individual’s cost-sharing obligation (usually via payroll) and submit it to the insurance company along with their portion of the premium.
Every year prior to open enrollment, the sponsoring employer or affinity group is responsible for deciding if they will renew their current policy or policies or offer new ones to their employees or members.
How does it work for employees?
For employees and affinity members to participate in a Group Health Plan, they must be employed by or a member of a sponsoring entity. If they are employed by or a member of a sponsoring entity, said entity will give them the option to participate in a group plan either during the organization’s open enrollment period or during a special open enrollment period if they join outside of the open enrollment period.
Once employees choose their desired Group Health Plan, their employer or sponsoring affinity group will collect their premium cost-sharing obligation (usually via payroll) prior to their income taxes being assessed. That means any amount individuals pay for their Group Health Plan premiums is tax-deductible.
Individuals will receive their health insurance cards directly from the insurance carrier and will have to resolve any claim disputes with the carrier as well. Their master policy holder is only responsible for maintaining the health plan on their behalf.
What are the benefits of offering this type of plan?
For employers, there are many benefits to offering a Group Health Plan.
- Employees like having health insurance. In fact, it’s the most important benefit employers can offer. It makes employees more loyal, which increases retention and makes your job offer more attractive to potential candidates.
- It leads to a healthier (and more productive) workforce. People with health insurance are, on average, healthier than people without health insurance. And people who are healthier are more productive and are less likely to suffer from presenteeism, which is where they are “present” at work but dealing with personal issues instead of their job.
- Businesses save on taxes. Health insurance premiums paid by employers are considered a tax-deductible business expense and small businesses might be eligible for additional tax breaks. If you’re an employer with 2-25 employees and you offer a Group Health Plan, you might be entitled to a Health Insurance Premium tax credit.
- Group Health Plans are typically cheaper than individual plans. Since groups are less risky to insure than individuals, insurance companies typically offer better rates to groups (and the larger the group, the better the rate). This might make opting into a Group Health Plan more attractive to an employee than participating in an Individual Coverage HRA.
- Can be paired with a Standard Health Reimbursement Arrangement for a robust benefits package.
Additional benefits to pair with Group Health Insurance
While offering a Group Health Plan is highly beneficial to your company or affinity group and its employees or members, it’s only part of a complete benefits package. If you want to offer a robust benefits package, consider one of these three types of supplemental accounts: 1. Standard HRA. This type of HRA is also known as a Group Coverage HRA or Integrated HRA and can only be offered if the company or affinity group also offers its employees or members a Group Health Plan. This account is 100% employer-funded and employer-owned and can be used to pay for a wide range of qualified out-of-pocket expenses. Employers have a great amount of flexibility and control over how these accounts function including: how much an employee can reimburse for, the types of expenses which are eligible for reimbursement, what happens to the account once the employee leaves and more. 2. Health Savings Accounts (HSAs). These accounts must be paired with an HDHP, they’re employee-owned and can be funded by employers, employees and others. The IRS governs annual contribution limits and the types of eligible expenses and account balances rollover from year-to-year. When an employee leaves the company, they take the account with them. 3. Flexible Spending Accounts (FSAs). These types of accounts are employer-owned and can be funded by both employer and employee. The IRS governs the types of expenses for which can be reimbursed through an FSA and the annual FSA contribution limits, but since the employer owns this account, they can choose what happens to unused funds at the end of the year (e.g. rollover, grace period or forfeiture). Unless the employee elects into COBRA, they forfeit their funds when they leave the employer.
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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.