Is Employer Health Insurance Mandatory? [Know Your Rights as an Employee]

Health insurance laws can differ from state to state. These laws affect both the business and its workforce. But is employer health insurance mandatory in the USA?

According to the Affordable Care Act (ACA), big companies must offer their workers health insurance plans. While smaller businesses aren’t bound to follow this law, they can offer Health Savings Accounts (HSAs) or Health Reimbursed Arrangements (HRAs) instead.

If employers pay health insurance, it gives the employees a sense of security. Keep reading to learn about the benefits and eligibility criteria for employer health insurance.

Why Should Employers Pay Health Insurance?

Employer-sponsored health insurance is the most common type in the United States. It covers a wide range of ages. Everyone from young dependents to employees nearing retirement can enjoy it.

But are employers required to pay for the employee’s health insurance?

Legal Obligations

There’s no one-size-fits-all rule for employer health insurance. Some states require companies to offer it, while others are more flexible. If you don’t fulfill these obligations, you’ll be penalized.

Employer Benefits

You can get a competitive advantage by offering health insurance to your employees. This will attract and retain top talent, and healthy employees will be more productive, regular, and beneficial to the company.

Tax Benefits

The cost of employee health insurance is tax-deductible for businesses. This can provide significant tax savings for employers.

Find out the truths about health insurance for employees and never give up your right!

Legal Obligation for Large Employer Health Insurance – Affordable Care Act

Companies with at least 50 full-time workers must provide health insurance for those employees (and their kids up to age 26) or face fines.

The exact fine depends on how many workers get covered. You should cover at least 95% of your full-time employees and dependents.

Now, who are full-time employees? Everyone who works 30 hours a week or more counts as full-time. The company must offer at least one health plan that covers children until they turn 26.

However, this doesn’t include spouses, so you don’t have to cover them!

COBRA — Federal Law for Employer Health Insurance Continuation

COBRA (Consolidated Omnibus Budget Reconciliation Act) is a federal law that allows qualified beneficiaries to continue group health insurance coverage.

Generally, COBRA applies to plans offered by private sector businesses with 20 or more employees.

But there needs to be at least one qualifying event —

• Termination of employment (except for gross misconduct)
• Reduction in work hours that affects your health insurance eligibility
• Divorce or legal separation from a covered employee
• Death of a covered employee
• Medicare eligibility for a covered employee
• Loss of dependent child’s coverage under the plan

You must also be a qualified beneficiary under the employer’s health plan at the time of the qualifying event. This includes:

• The employee
• The employee’s spouse
• Former spouses
• Dependent children

If you meet the eligibility criteria, you can elect COBRA continuation, but you are responsible for paying the total premium cost.

You should also know that COBRA continuation is temporary. It can last up to 18 or 36 months, depending on the qualifying event.

Types of Employer Health Insurance in the USA

Most health insurance in the US comes from employers, covering over 70% of workers and reaching many families (over half of children and 36% of non-working adults).

Let’s look at the different types of employer health insurance to understand what works the best for you —

Health Reimbursement Arrangements

Health Reimbursed Arrangements are approved by the IRS and free from tax. The company puts aside money each month to help employees pay for medical bills or their health insurance plans.

This gives small businesses more flexibility in managing healthcare spending. Example —

• Qualified Small Employer HRA
• Individual Coverage HRA
• Group Coverage HRA

Pros:

• HRAs are budget-friendly for employers.
• You can set a fixed yearly allowance for employee healthcare. This helps you avoid unexpected cost increases.
• The unused funds can stay with your company.
• HRAs are also easy to manage and come in various options to fit any size or budget business.
• This arrangement helps the employees to meet their unique healthcare needs.

Cons:

Employees may need help understanding HRAs. You’ll need to explain how it works, what costs qualify for reimbursement, and how to choose individual insurance.

Small Group Health Insurance

Small group health insurance is a type of health insurance plan designed for small businesses with at least two and up to 50 full-time employees. These plans cover all the essential health benefits that are required by the Affordable Care Act (ACA).

Pros:

• Since it’s a common option, your employees need less explanation.
• Many insurance brokers specialize in these plans and can guide you through the process.
• Employers typically cover a significant portion of the monthly premium, lowering employee costs (average employer contribution is 83% for single and 73% for families in 2021).
• Sometimes, employees may pay more than half the premium for family coverage.

Cons:

• Employees don’t have much control over the plan details like network, deductible, or premium.
• The health insurance plan is the same for everyone, regardless of age and condition. So, it may not fulfill your unique healthcare needs.
• Health insurance is expensive and gets pricier, putting a strain on small business budgets.
• Employers may not be able to offer the plan if they can’t afford their contribution or if not enough employees are interested. This means you have less reassurance of getting your needs covered.

Health and Wellness Stipends

A health stipend is like a fixed monthly allowance employees get to cover medical costs. It’s paid through a card, reimbursement, or account.

Even though it’s taxed like a raise, it gives you more control and your employees more flexibility. So, the employees can decide how they want to use the money for healthcare.

Wellness stipends go beyond healthcare needs. They allow employees to use the funds for a wider range of things, like gym memberships, mental health apps, or meditation programs. This can improve employee well-being in mind, body, and spirit.

Pros:

• Unlike formal health plans, stipends can be customized to fit your needs. You choose what expenses qualify.
• You can offer stipends to more employee types like contractors or international employees, compared to health insurance or HRAs.
• Employees with federal tax credits can use both that and a stipend.
• You set the maximum monthly allowance and avoid annual rate hikes common with group plans.

Cons:

• Employees might not value a stipend as much as an HRA or health insurance.
• You can’t verify how employees spend the stipend money, unlike HRAs, which require receipts.
• You lose out on tax savings for contributions and may not qualify for small business healthcare tax credits.
• Stipends don’t meet the ACA’s employer mandate. As your company grows and you need to offer formal coverage, you’ll face penalties if you haven’t already.
• Payroll taxes apply to employer contributions, and employees are taxed based on the stipend amount.

Factors of Health Insurance Cost: Small vs. Large Employers

Depending on the size of your business, your employer’s health insurance can depend on many aspects —

Small Employers (<50 Employees)

Unlike large employers, health insurance for small businesses is different. They don’t have the bargaining power to negotiate rates directly with insurers.

Instead, insurers set premiums based on several rating factors specific to the small employer group:

• Employee/Dependent Age: The average age of employees and their dependents significantly impacts cost. Younger groups tend to have lower healthcare needs, leading to lower premiums.
• Benefits Selected: The type of plan (HMO, PPO, etc.) and the level of coverage (deductible, copay) directly affect the cost. More comprehensive plans with lower deductibles will be pricier.
• Location: Healthcare costs vary notably by state and even by region within a state. If you’re an employer in areas with higher medical expenses, you will be expected to pay more for health insurance.
• Family Coverage: The number of employees enrolling family members can significantly increase the cost.
• Tobacco Use: Smoking tobacco increases the risk of health problems. So, if a higher percentage of employees use tobacco, the insurer may charge a higher premium.

Large Employers (>= 50 Employees)

Large employers have more control over their plans and may be less vulnerable to cost fluctuations based on employee demographics.

• Negotiated Rates: Large companies have more leverage and can negotiate lower rates directly with insurance companies. This gives them more control over their health insurance costs.
• Less Impacted by Rating Factors: Large employer plans are usually less affected by factors like employee age or tobacco use, and are not as regulated by state laws, meaning these factors have a smaller impact on their costs compared to small employers.

What Penalties Can You Receive for Not Paying Employer Health Insurance?

If your company doesn’t offer health insurance, or the plan you offer is expensive or doesn’t cover enough, you can face penalties if any full-time employee gets a government subsidy to buy insurance elsewhere.

The penalty amount depends on the situation:

Failing to Offer Coverage to 95% of Employees

This is a major violation and comes with a heavy penalty. In 2023, it was $2,880 per full-time employee, but the first 30 employees were excluded. Now, in 2024, you need to pay $2,970 per full-time employee, again excluding the first 30.

Coverage Doesn’t Meet the Value Requirement

Even if you offer coverage to 95% of employees, it must meet a minimum standard of value. This means it should cover a substantial portion of their healthcare expenses. In 2024, you need to pay $4,620 per employee.

Coverage not Affordable

The employer-sponsored coverage must also be affordable for employees. If your coverage exceeds a specific percentage of their household income then you’ll be penalized. You must pay $4,620 per employee receiving a PTC due to unaffordable employer-sponsored coverage.

So, make sure to conduct regular assessments of your healthcare plan to ensure it meets ACA requirements. You should always stay updated on changes to ACA regulations and adjust your coverage strategy accordingly.

Final Words

Employer health insurance is an irreplaceable part of the American healthcare system. It offers financial protection and medical attention to millions of people.

You can receive employer health insurance according to the Affordable Care Act and the Consolidated Omnibus Budget Reconciliation Act.

Besides, depending on the size of your company, you may also get HRAs/Group Health Insurance/Health Stipends, etc. If you find this confusing, consult a professional right away!