What is an employer-sponsored health plan?

Understanding employer-sponsored health plans is critical for employers looking to attract and retain top talent. These plans offer employees comprehensive healthcare coverage that's more affordable than options like personal health insurance. 

In this guide, we'll explain what employer-sponsored health plans are and how they work. We'll also explore the advantages of integrating them into your employee benefits strategy.

What is an employer-sponsored health plan? 

An employer-sponsored health plan, also known as group health insurance, is a health insurance policy provided to employees and partially financed by employers. It covers employees and their dependents, making it a primary method for accessing affordable health coverage in the United States.

When employers offer this type of insurance, they usually share the cost of premiums with their employees. A premium is the amount an insured person pays periodically to keep their insurance policy active. This cost-sharing model not only makes healthcare more accessible to employees but also alleviates the significant financial burden of health insurance.

Additionally, employer-sponsored health plans offer tax advantages. Employees typically pay their portion of the premiums with pretax dollars, which reduces their taxable income and, consequently, their overall tax liability.

Incorporating group health insurance into your company’s compensation package is an effective way to support your team. This benefit is vital for employee well-being, and fostering a healthy workforce can enhance overall company wellness and productivity.

How does employer health insurance work? 

Do employers have to offer health insurance benefits? The short answer is yes and no. 

Under the Affordable Care Act (ACA), businesses with more than 50 full-time employees must provide health insurance. This ensures larger businesses participate in keeping the workforce healthy. 

Businesses with fewer than 50 full-time employees are not required to provide health insurance according to ACA regulations; however, many choose to offer it. For small businesses, providing health coverage is a strategic benefit that can attract and retain talent. It also enables them to take advantage of tax credits available for small employer health insurance premiums.

The situation is different for contingent workers like independent contractors. Legally, companies aren't required to provide health insurance to non-employees, but doing so can enhance their loyalty and potentially make the business more appealing to a broader range of freelancers.

Group health insurance through employers requires participation from at least 70% of the company's workforce. Although this threshold might seem high, these plans are typically more cost-effective than individual health insurance because risk is distributed across a group of employees, reducing premiums for all participants (more on that in a bit).  

Managing global benefits can be challenging if you operate in multiple countries. Oyster Total Rewards offers global compensation solutions for employee well-being, including health coverage in more than 165 countries. This coverage can be combined with country-specific benefits to ensure compliance with local laws. 

Types of employer-sponsored health coverage  

If you're considering providing health insurance to your employees, it's crucial to understand your options. Here's a closer look at three common types of employer-sponsored health plans, including their benefits and drawbacks:  

Group health insurance 

Employers commonly provide group health insurance, which combines all employees under one policy to distribute the risk and reduce premium costs for both employers and employees.

Pros 

• Familiarity: Most employees are familiar with this model, which simplifies communication and administration.
• Broker assistance: Insurance brokers help employers navigate the purchasing and management of the group health insurance plan.
• Shared costs: The employer and employees share the cost of premiums, making coverage more affordable for all participants.

Cons 

• One-size-fits-all: Group health insurance may not effectively meet the specific health needs of all employees due to its generic nature.
• Cost increases: Annual increases in premiums can financially strain both employers and employees.
• Participation requirements: Achieving and maintaining the minimum employee participation required for group health insurance can be challenging.

Health reimbursement arrangements (HRAs) 

An HRA is an employer-funded health insurance plan that reimburses employees for out-of-pocket medical expenses and certain insurance premiums. HRAs allow employers to set aside a fixed sum for employees' health expenses, offering cost control and flexibility. 

Pros 

• Budget control: Employers can manage healthcare spending by allocating fixed reimbursement amounts.
• Customizable benefits: Employees can use their allocated funds for healthcare services that best meet their individual needs.
• Tax efficiency: HRA contributions are tax-free, providing a fiscal advantage.  

Cons 

• Lesser-known: HRAs are not as widely recognized as other health plans, such as group insurance, requiring employers to educate their teams about how these plans work.
• Ownership restrictions: There are eligibility restrictions on who can participate in HRAs. For instance, owners of S-corporations are typically excluded from participating.

Health and wellness stipends 

Stipends are flexible allowances that employers provide employees for various health-related expenses, such as wellness programs, insurance premiums, gym memberships, therapy, and mental health apps. Employees use these allocated funds according to their preferences.

Pros 

• Flexibility: Stipends can be applied to any health and wellness expenses that the employee chooses.
• Easy to manage: Stipends are easy to administer, particularly with a platform like Oyster that manages employee benefits. 
• Broad eligibility: Full-time employees, part-time employees, independent contractors, and international employees can access health and wellness stipends.  

Cons 

• Taxable: Stipends are considered taxable income, which reduces employees’ net pay.
• Perception as pay: Some employees might perceive stipends as part of their regular salary rather than as distinct benefits.
• Non-compliance risks: Stipends do not fulfill the Affordable Care Act (ACA) requirements for employer-provided health insurance, which may pose compliance risks.

Benefits of employer-sponsored health insurance 

Employer-sponsored health plans offer significant benefits over individual, private health insurance. Here's a breakdown of why these plans are an excellent choice for employers and employees:

Benefits for employers 

• Attract and retain talent: High-quality health insurance is a primary factor in many workers' decisions to accept a job offer. For example, a tech startup might attract top talent from larger firms by offering better health benefits. 
• Pay less tax on premiums: Employer contributions to health insurance premiums are tax-deductible. This lowers the company's taxable income and reduces its overall tax liability, making offering employer-sponsored health insurance a financially savvy option. 
• Lower insurance costs: Pooling employees into a group health plan reduces risk by distributing it across a larger group of individuals. This helps employers negotiate lower premium rates with insurance providers and minimizes the financial impact of high health insurance claims from any single employee.  

Benefits for employees 

• More affordable health coverage: Employer contributions to these plans make premium costs more affordable for employees. For example, when an employee pays 30% of their premium cost, and their employer pays the remaining 70%, the employee can afford health coverage on a moderate salary. 
• Lower taxable income: Employees typically contribute to health insurance premiums on a pretax basis through payroll deductions. This decreases their gross income, reducing the amount of income tax owed. 
• Access to broader coverage: In some cases, employer-sponsored health plans offer more extensive coverage than individual health plans. This can include access to more healthcare providers and physical and mental health therapy services.  

Offer benefits to employees worldwide with Oyster 

Oyster makes managing global health insurance benefits easy. No matter where your Team Members are based, Oyster can help you provide consistent, comprehensive health coverage that’s compliant with local laws in more than 180 countries. The Oyster platform streamlines the entire process, so you can focus on nurturing and growing your team with region-specific salary, equity, and benefits.

About Oyster‍

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.