Individual health insurance vs. group health insurance

Individual health insurance or group health insurance: which is better for your small business?

Small business employers face a surprisingly difficult choice with the most basic of employee health insurance questions: Should the employer offer group health insurance or allow the employees find their own individual health insurance? This is no longer an inconsequential issue since we now pay almost 10% of our household income for this insurance. The wrong employer choice can actually cause some employees to be excluded from coverage.

We should consider that the choice of type of health insurance coverage involves a range of other related issues. We need to consider who will pay for the insurance and how much, how it may be different for different employees, how much the insurance costs, eligibility for tax credits, sustainability of the coverage if the employee moves, reduces work hours or changes employment, and additional.

The Basics

Employers should start with an understanding of health insurance basics:

1. A small business employer has no obligation to provide employee health insurance and there is no penalty or cost for not doing so.
2. If the employer voluntarily chooses to provide employee health insurance, it is then subject to a range of requirements and possible penalties if those requirements are not met.
3. Employers who do not offer group insurance are required to give employees written notice of their individual health insurance options.
4. Group insurance is controlled by the employer who may start, stop and change it at will. It is only available to those who meet the employers and the insurance company’s stated requirements.
5. Individual insurance is controlled by the employee who may start, stop and change it at will without regard to any employment issue. Some type is available to everyone.
6. Individual insurance covers one family unit, group insurance covers more than one family unit. A husband and wife and their working teenager ll employed in the family business are one family unit. It might sound intuitive but the rules were not always interpreted this way.
7. Most individual and group insurance policies provide “minimum essential benefits” required under the Affordable Care Act. However, there are both individual and group health insurance policies that do not provide this qualifying coverage. It is always best to check.
8. With few exceptions, both individual insurance and group insurance work on a calendar year basis.

The details

Beyond that, it largely becomes a matter of money. The cost of coverage, how to pay for it, and the tax consequences become the major issues.

1. An employee eligible for affordable group insurance is not eligible for a government-paid subsidy.
2. Individual insurance is typically less expensive than group insurance.
3. Group insurance is typically more robust and has lower out-of-pocket costs.
4. Tax subsidies for individual insurance are intended to be permanent and based on income.
5. Tax subsidies for group insurance is intended for only two years.
6. Employers should not pay for individual health insurance.
7. Employers should offer employees with individual health insurance the option of an after-tax salary-deducted payment option as a best practice but are not required to do so.
8. Short term health insurance is less expensive but provides less coverage and is only available as individual coverage.
9. Health insurance companies are systematically reclassifying group health insurance of the smallest companies as individual insurance when they have the opportunity to do so. For example, husband and wife businesses are generally no longer eligible for group insurance as a 2 employee business.

Conclusion

Group health insurance has long been the standard and the most appropriate type of health insurance coverage for use in a business setting. But as a practical matter, group insurance is out of reach of many small businesses with modest income workers. It is far less expensive to cover modest income workers with individual health insurance. Small business employers simply need to be careful to avoid unintentionally violating the rules designed to keep these types of coverage distinct.

The Affordable Care Act has triggered more confusion among small business owners and advisers than any other legislation in our lifetime. I specialize in the field of small business employee benefits and offer consultations that can help lead to better management decisions.