How Does Health Insurance Work Through Employer: A Comprehensive Guide

Key Takeaways

• Employer health insurance provides coverage options for employees and their dependents. Employers choose the plan or plans and define coverage details, and costs are shared between employers and employees.
• Under the Affordable Care Act (ACA), health insurance policies cover allowable amounts for claims, how costs are determined, and effective dates. For a comprehensive guide on “how does health insurance work through employer,” keep reading below!

1. Employer Health Insurance Overview

Before we explore the detailed guide on “how does employer health insurance work,” let’s take an overview!

1.1. The Basics of Employer Health Insurance

Employer health insurance is a healthcare plan employers provide to their employees and often extend to their dependents under the age of 26. Employers are responsible for selecting the plan and defining its scope of coverage, which includes annual doctor visits, hospital stays, and prescription drugs.

Employer health insurance can cover everything from routine checkups to significant medical expenses for serious illnesses or injuries.

The cost of health insurance is shared between employers and employees, and employer contributions vary based on state regulations. For instance, New York mandates that employers cover at least 50% of employee premiums.

So, what are the advantages and drawbacks of employer-sponsored health insurance? Let’s find out with ERA!

Pros	Cons
– Employees benefit from a broader network of insurance providers. – Employer contributions reduce the financial burden of employee premiums. – Employer-sponsored plans offer a simpler enrollment process compared to individual plans.	– Employees are restricted to the plans offered by their employer. – Employers can modify plans, affecting employees’ coverage and costs. – Employees who leave the company lose their employer health insurance.

1.2. Factors Influencing Eligibility for Employer Health Insurance

Eligibility for employer-provided health insurance can vary based on several key factors:

• Full-time vs. part-time employment: Some employers offer insurance exclusively to full-time employees, while others may extend coverage to part-time staff who work less than 24 or 20 hours.
• Waiting period: Employers might require employees to complete a specific tenure before they become eligible for health insurance. The Affordable Care Act (ACA) mandates that this period not exceed 90 days.
• Dependent coverage: Many health insurance plans allow employees to include dependents, such as spouses and children, under their coverage.

1.3. Benefits of Health Insurance To Employers

Employer-sponsored health insurance offers businesses significant advantages, including:

• Stronger Talent Attraction: Employer-sponsored plans make the company more appealing to job seekers prioritizing health benefits.
• Increased Employee Productivity: Health insurance promotes a healthier and more focused workforce.
• Lower Insurance Premiums: As more employees enroll in the plan, the risk is spread across a larger group, often leading to lower insurance premiums
• Reduced Costs: The premiums are tax-deductible, potentially reducing the company’s tax liability by thousands of dollars annually.

2. How Does Health Insurance Work Through Employer? 

2.1. Are Employers Required to Offer Healthcare Coverage?

According to the ACA, companies with 50 or more full-time employees must provide health insurance to their workforce. This mandate primarily targets larger corporations.  99% of all companies in the United States are small businesses, which often lack the financial capacity to offer such benefits and thus do not have to offer ACA health insurance.

Smaller employers with fewer than 50 full-time staff aren’t obligated to offer health insurance but often do so to attract and retain talent. They can also consider the  Small Business Health Options Program (SHOP) for coverage.

The benefit of the SHOP insurance

2.2. The Costs of Employer Health Insurance

For small businesses under 50 full-time staff, insurers must adhere to the ACA and applicable state regulations when determining health insurance premiums. Key factors influencing these premiums include:

• Age

Under the ACA, the base premium for 21-year-old and older individuals can be charged up to three times this rate. States may establish small group premium rates based on age, provided they do not exceed a 3:1 ratio. Notably, the most significant premium increases occur after age 55.

• Location of Business

Insurers may consider geographic factors, such as the local cost of health care, when calculating small-group health insurance premiums. As a result, premiums can vary between different areas within the same state.

However, insurers cannot adjust premiums based on health status, meaning they cannot charge higher premiums in regions with higher rates of severe health conditions.

• Employee Family Size

Premiums may be adjusted based on family size, leading to higher costs for covering spouses and dependents. According to a 2019 Kaiser Family Foundation research, premiums for single coverage increased by 4%, while family coverage premiums rose by 5% over the previous year.

For medium and large businesses (with 51 or more employees, or 101 in some states), insurers may consider factors like the group’s claims history, industry, employee occupations, gender, age, business location, and level of coverage when setting premiums.

2.3. What Is the Allowable Amount for Insurance Claims?

The allowable amount is the maximum dollar figure an insurance company deems as full payment for a service, as agreed upon with network providers. This amount is usually a discounted rate, lower than the original charge for the service.

For example, if David visits an in-network doctor and the total charge is $100, the insurance carrier may set the allowable amount at $80. David’s insurance will pay this amount (minus any co-pays or deductibles). The $20 difference is a provider write-off, so David won’t be billed for it. However, if the doctor is out-of-network, David may be responsible for the full $100 charge.

2.4. Do Employees Need a Social Security Number to Sign Up for Health Insurance?

SSNs are typically required for employees enrolling in group health coverage through their company. However, if they do not have an SSN, such as someone working in the U.S. on a work visa or a student on an F-1 visa, they can use their Individual Taxpayer Identification Number (ITIN) instead.

Sample of ITIN

2.5. Which Type of Insurance Coverage Do Employers Typically Provide to Their Employees?

Employers typically offer the following types of health insurance coverage:

• Health Maintenance Organization (HMO): Low premiums and deductibles. Enrollees must use in-network doctors but save on costs.
• Point of Service (POS)Plans: Higher premiums than HMO. Enrollees can see out-of-network doctors but at a higher cost and need referrals to see specialists.
• Preferred Provider Organization (PPO): Higher premiums but offers flexibility. Enrollees can see both in-network and out-of-network doctors without needing referrals.

2.6. How to Determine an Employee’s Insurance Effective Date?

The employee’s hire date and the employer’s waiting period determine the insurance effective date. For example, if the waiting period is “First of the following month” and the hire date is September 23, 2024, the insurance effective date will be October 1, 2024.

2.7. How Long is the Waiting Period for Health Insurance?

A waiting period is the duration employees must work before their health insurance starts covering medical expenses. Employers determine this period, but it cannot exceed 90 days under the ACA. 

Waiting periods begin when an employee becomes “benefits-eligible,” such as a new hire or a part-time worker transitioning to full-time. While carriers can adjust waiting periods mid-year, they cannot charge for individual employees.

Additionally, waiting periods can vary by type of coverage but must be uniform within each type. For example, employers may impose a waiting period for medical coverage until the first day of the month following the hire date and a 50-day wait for dental and vision coverage.

However, employers cannot have different waiting periods for different plans within the same coverage type, such as a 30-day waiting period for a medical PPO and a 60-day waiting period for a medical HMO.

2.8. How to Define Imputed Income for Life Insurance and AD&D Plans? Why Does It Matter?

Imputed income represents the value of benefits employees receive beyond their regular taxable wages, for which they do not directly pay, including Group-Term Life Insurance, Accidental Death & Dismemberment (AD&D) Insurance, company cars, trips, gym memberships, and adoption assistance.

What’s covered by AD&D Insurance

• Imputed Income for Group-Term Life Insurance

The first $50,000 of life insurance coverage is tax-free. However, if coverage exceeds $50,000, the Internal Revenue Service (IRS) requires that the excess premium paid by the employer be considered imputed income, which is added to the employee’s gross income.

For voluntary life plans, if the employee’s premium rate is below IRS thresholds stated in Publication 15-B Table 2-2, imputed income may also apply to the excess premium difference.

• Imputed Income Calculation

For a policy covering 1x the base salary, such as $75,000, imputed income is calculated based on the premium for the excess coverage. If AD&D is included, its value is not combined with life insurance for imputed income calculation. The imputed income calculation is confined to the excess amount, such as $25,000, in this example.

Understanding imputed income is essential for accurate tax reporting and compensation. By incorporating imputed earnings into gross pay reports, employees can fully appreciate the value of their benefits, increasing their likelihood of staying with the company.

Watch this video for an in-depth discussion on “how does employer insurance work,” featuring insights from two experts: Clarke Bowles, Commercial Director at PGC Group, and David Rose, CEO at US Expansion Partners.

2.9. Do Employer of Record (EOR)Services Offer Employer Health Insurance?

Yes, EOR services include health insurance as part of their comprehensive management of recruitment, payroll, compliance, and benefits in line with local regulations.

ERA offers global EOR solutions in over 100 countries. Contact us to consult on a worldwide workforce solution that facilitates rapid international expansion.