This article provides a simple breakdown of the differences between group and individual health insurance.
As a small business owner, it is in your best interest to offer your employees a comprehensive benefits package, but how do you know what works and what doesn’t? Health insurance is a good place to start but there are so many options available. For instance, what is the difference between group and individual health plans for your employees? The names can be deceiving, so take a minute and find out how they differ.
What is Group Insurance?
Simply put, group health insurance is a health insurance plan you extend to your business’s staff and, perhaps, their dependents. With a group health insurance program, small business owners pay either all or part of the cost of the monthly premiums for their employees but typically reap certain tax benefits as a result.
What is Individual Insurance?
Individual health insurance is purchased by individuals or families on their own, separate from any business. Unless they are provided with employer-sponsored health insurance, most people are required to purchase individual coverage on their own or face a possible tax penalty under the Affordable Care Act (Obamacare). When buying their own individual plans, employees may have more control over what plan to choose, but they may end up paying more. As a small business owner, you might find ways to legally help employees afford health insurance, but the cost of individual insurance plans is ultimately the responsibility of the employee.
What is the Difference Between Group and Individual Health Insurance?
There are many differences between these two models of health insurance both for you as the employer and for your staff such as:
- Group health insurance coverage for an employee usually starts shortly after you hire a new employee – that is a major consideration because new hires know when they will have coverage.
- Individual health insurance plans require more planning. A new employee must generally shop for a plan and purchase during the nationwide Obamacare open enrollment period or after experiencing a qualifying life event.
- With a group health insurance plan, you may provide your employees with quality health insurance benefits that they may not be able to afford themselves.
- With individual coverage, you are leaving your employees to get coverage for themselves in compliance with the Affordable Care Act. There may be ways you can legally help them cover the cost of their coverage in some states, but the rules are restrictive and you’ll need to work with legal and tax advisors to make sure you’re in compliance.
- Group health insuranceplans tend to be a better investment for small businesses. As an employer, you will likely pay at least fifty percent of the monthly premiums for your employees, but you can typically deduct these costs from your business taxes and, in some cases, you may even be eligible for special tax credits. Any contribution your employees make toward their premiums are generally paid from their pre-tax salaries, too, which can add up to significant savings for them.
- With individual health insurance, the payments made by your employees are typically not from their pre-tax salaries, so they would typically have to pay more of their total compensation in taxes. Depending on their income level, however, they may be eligible for special government subsidies under the Obamacare law.
There is no right or wrong answer when it comes to health insurance planning for small businesses because there are many variables to consider. A licensed insurance broker can list the pros and cons of each model and help you develop a strategy that is best for both the company and employees. Always consult your tax and legal advisors to understand your specific tax and compliance situation. This article is for general information and not intended to provide any tax or legal advice.