Individual health insurance vs. group health insurance

If you’re an employer who’s focused on attracting and retaining talented workers, including a robust health benefit in your compensation package is essential. But if you’re offering health benefits for the first time, knowing where to start can be overwhelming.

If you’ve done any research into health benefits, you’ve probably heard the terms “group health insurance” and “individual health insurance”. But what’s the difference between them, and how do they compare?

In this article, we’ll compare group and individual health insurance, including how they work and how you can leverage a health reimbursement arrangement (HRA) with each option.

Takeaways from this blog post:

• Group health insurance is offered by employers to their eligible employees and their dependents. They typically require employers to meet a 70% participation rate to avoid adverse selection and require employers to split premium costs between themselves and participating employees.
• Individuals and families can buy individual health insurance on public or private health exchanges. They can buy and keep these types of plans regardless of employment status and apply for tax credits and other cost-saving subsidies on public marketplaces to save on premiums.
• Employers can use health reimbursement arrangements (HRAs) with individual insurance policies and group health plans. HRAs can help employees save on out-of-pocket expenses, health insurance premiums, or both.

How does group health insurance work?

Traditional group health insurance, sometimes called employer-sponsored coverage or a group plan, is a type of policy an employer purchases and offers to eligible employees and their dependents. Currently, almost 153 million Americans have employer-sponsored health insurance¹.

If you choose to offer group coverage, you can exclude your part-time employees from participating in the benefit. However, if you decide to include some of your part-timers, you must make it available to all your part-time staff.

Since the federal government implemented the Affordable Care Act (ACA), insurance providers can no longer deny coverage to employees with pre-existing health conditions or charge a higher premium. Their medical history also won’t affect employee group eligibility.

All common types of group health plans typically work in the following way:

• Employers select one or more plans to offer their employees
• Plans generally require a 70% minimum participation rate among employees to spread risk among the group of employees and avoid adverse selection
• Group members have the choice of enrolling in or declining employer coverage
• Group health premiums are split between the employer and participating employees
• Employees can add family members and dependents to group plans for an additional cost
• Enrolled employees pay a monthly premium to maintain medical coverage, generally on a pre-tax basis from their paycheck

There are important terms you’ll need to know regarding group plans. Your employees will have a high, low, or zero deductible, depending on your group plan. They must pay their deductible before the insurance company pays for a portion of any claims.

Once they reach their deductible, coinsurance kicks in until they reach their out-of-pocket maximum. This is when the health insurance provider will cover 100% of their medical costs for the rest of the plan year.

How does individual health insurance work?

Individual health insurance is a health plan individuals purchase on their own without assistance from an employer or a federal government program, like Medicare or Medicaid. Individual insurance plans include self-only coverage policies as well as family health plans.

Individuals can purchase their medical plan from a public or private health exchange. The most notable public exchange is the Federal Health Insurance Marketplace, but state-based marketplaces are also public exchanges.

Private exchanges involve purchasing an individual plan directly from health insurance companies or with the help of an insurance agent or broker. While public exchanges only offer ACA-compliant health plans, private exchanges can offer ACA-compliant and other health insurance plans.

Whether an individual purchases a plan on a private or public health exchange, the policy will stay with them until they cancel it—it’s not tied to employment.

Lastly, premium tax credits and other cost-saving government subsidies are available on public exchanges for those who qualify based on income. However, eligible individuals can’t receive premium tax credits or a cost-sharing subsidy on private exchanges.

Other than these differences, individual health insurance plans work similarly to group plans. Like group policies, health insurers can’t deny coverage for pre-existing conditions. Policyholders make monthly premium payments to maintain coverage and pay a deductible, copay, and coinsurance, depending on their plan coverage level. They will also have an out-of-pocket maximum.

How group and individual insurance compare

To keep it simple, the chart below highlights a few ways group health insurance compares to individual health insurance for employers and employees.

How the average cost of group and individual health insurance policies compare

In 2023, the average premium costs for individual and group health insurance plans were as follows:

Not only are individual health plans less expensive on average than group health plans, but they also help employers save on administration time when employees purchase and manage their own plans.

How HRAs work with individual and group health insurance

Whether you choose to go with a group plan or have your employees get individual health coverage, there’s an HRA you can leverage to help your workers save on their medical expenses.

HRAs allow you to reimburse your employees, tax-free, for qualifying out-of-pocket costs and, sometimes, individual health insurance premiums.

The way HRAs work is simple. You give your employees a monthly allowance to spend on insurance premiums and other qualifying medical expenses. After they submit proof of purchase and you approve the cost, you reimburse them up to their allowance amount. Because HRAs aren’t accounts, any unused money stays with you at the end of the year.

The type of HRA your organization is eligible for depends on whether a group or individual plan covers your employees. Below, we’ll review three popular types of HRAs for both coverage options: the qualified small employer HRA (QSEHRA), the individual coverage HRA (ICHRA), and the integrated HRA.

Qualified small employer HRA (QSEHRA)

A QSEHRA is an excellent option for employers with fewer than 50 full-time equivalent employees (FTEs) who don’t have a group health plan. Employees must have a health insurance policy with minimum essential coverage (MEC) to get tax-free reimbursements. Their individual insurance monthly premiums and out-of-pocket medical expenses are eligible for reimbursement, helping them save on healthcare costs.

The QSEHRA has annual contribution limits set by the IRS, so employers can only give their employees up to the maximum amount. However, you can offer less than the annual limit if you're on a budget.

Regarding eligibility criteria, you must offer the QSEHRA to all your full-time W-2 employees. Part-time employees can participate if you wish. However, compliance regulations mandate that you provide them the same allowance amount as your full-time employees.

Individual coverage HRA (ICHRA)

The ICHRA is similar to the QSEHRA, but it has extra flexibility. It’s for organizations of all sizes and has no contribution limits, so it works for every employer’s budget. With an ICHRA, you can easily reimburse employees for their individual health insurance premiums and other qualified medical expenses.

Unlike the QSEHRA, the ICHRA allows employers to customize their benefits based on 11 employee classes. For example, if you want to offer one employee class a group plan and another class an ICHRA, you can do so. However, only employees with an individual health policy can participate in an ICHRA—any individual employee covered by a spouse’s employer plan or in a healthcare sharing ministry won’t be able to participate in the benefit.

Another important note—if you’re an applicable large employer (ALE), you can leverage the ICHRA to satisfy the employer mandate.

Integrated HRA

If you want to supplement your business’s traditional group health plan and an HRA for additional coverage, then an integrated HRA is right for you. An integrated HRA, also known as a group coverage HRA (GCHRA), is for employers of any size with group health insurance. Only employees who opt into your employer-sponsored insurance plan can participate.

Like the QSEHRA and the ICHRA, you offer a monthly allowance for your employees to pay for any eligible expense. Eligible expenses include those not fully covered in your group plan, like annual deductibles and other qualified medical expenses. However, an employee’s group plan premiums aren’t eligible for reimbursement.

Many employers integrate their GCHRA with a high deductible health plan (HDHP) to control their budget. However, any group health plan can work with a GCHRA. For example, if you choose a low-deductible health plan, you can pair it with a GCHRA to help your employees save even more on their health expenses.

Because integrated HRAs have no minimum or maximum allowance limits and are also customizable through employee classes, they’re flexible enough to meet every organization’s needs as additional coverage to group health insurance.

Conclusion

If you’re deciding which type of health benefit to offer your employees, it’s essential to understand the differences between group coverage and an individual policy. While traditional employer-based health insurance remains the popular choice for organizations, more modern approaches to health benefits, like HRAs, are quickly gaining popularity for their affordability and customization.

By allowing your employees to choose their own comprehensive coverage and reimbursing them for their expenses with a personalized HRA, you can offer them greater flexibility and better control over their medical decisions.

Schedule a call with us today to learn how an HRA can help boost your employee benefits package.

This article was originally published on January 27, 2015. It was last updated on March 22, 2024.

1. https://www.kff.org/report-section/ehbs-2023-summary-of-findings/

2. https://www.dol.gov/agencies/ebsa/workers-and-families/changing-jobs-and-job-loss

3. https://www.ehealthinsurance.com/resources/individual-and-family/how-much-does-individual-health-insurance-cost