Employer-sponsored Insurance or Individual Insurance: Which is Better?
Erick Kuhni
March 1, 2018
A question I am commonly asked by employees is whether they should take the health insurance offered by their employer, or whether they'd be better off just going it on their own. There are several factors that can affect the answer to this question, for example, whether person is a W-2 employee or self-employed can have different tax implications. For this article we will focus on W-2 employees and compare their options under a group health insurance policy vs an individual policy. If you are self-employed be aware that you have additional tax advantages not discussed in this article. We will cover those in the future.
Let's establish some terms:
individual plan or individual market will refer to health insurance policies that you buy directly from an insurance company, without going through your employer
group plan or group market will refer to health insurance policies that could purchase only through an employer.
*This is actually standard insurance language. Each state has 3 primary markets, Individual, Small Group (2 - 50 employees or 1 - 100 employee, depending on the State), and Large Group (anything bigger than Small Group). You're educated! congratulations!
We will answer the question in this article by looking at your options in terms of the following criteria:
Options - Plan(s) types and quality
Cost - Plan(s) cost
Employer Incentives
Eligibility
Taxes
**The sections Options and Cost rely on empirical data for health insurance products in Salt Lake City, Utah. The sections dealing with Employer Incentives , Eligibility and Taxes rely on national data.
Options - Plan(s) types and quality
2018 has seen some big changes in the individual market. This is largely due to the politics behind "Obamacare" (the Patient Protection and Affordable Care Act; PPACA), which has caused several insurers to cut the number of plan offerings they provide inside of the individual market, and in some case drop out altogether.
But this isn't a political article!
Taking Salt Lake City, Utah, as a case study we can compare their 2018 individual market against their Small Group market. This is useful because in most States the Individual markets and the Small Group markets share a lot of similarities with regard to how rates and plans are designed.
The breakdown looks like this:
For illustration, the number of plans according to their respective 'metal' category can be seen here:
Conclusion:
For 2018 there are substantially more options available to you inside of the Small Group Market. So at the high-level, if having more choice is important to you, then the Small Group Market is the better option.
...however! An exception to this reasoning will be the options your employer may have elected. For example, 181 options to your employer, does not mean 181 options to you. Regardless of how the market looks, if your employer has not provided a plan option that works for you, then there might be an option in the Individual Market. Use caution though, because as we've seen, your options are limited in the individual market. It's also good advice to try and work with your employer first, often times they are eager for your feedback and would be happy to add options that suit your needs if you are willing to speak with them about it.
**A Special Note to Employers**
Most insurance companies will allow you to offer multiple plan options, even for companies with as few as two employees. Consider pairing your options with a high/low approach or high/middle/low approach to have policy options that can meet a broader range of needs.
Cost
Costs for insurance policies inside of the individual market have been affected by the current politics as well. For the first time in several years, the average cost of individual plans are higher in 2018, than they are for small group plans. Using the Salt Lake City market again, and focusing on a person age 35:
Another helpful visualization (below) offers some insight into both plan volume and how cost is distributed in each market. We see the number of plans represented across the horizontal axis (or the x-axis from math class), and the age 35 cost going up vertically (the y-axis). Each dot represents a particular health insurance plan offered in either the individual market (green) or the small group market (blue).
From the data in these tables we can see that the small group market, in addition to having more plans, also has a more gradual increase in cost as the benefits become "richer".
Two additional considerations for cost are:
PPACA Subsidies - Individual Market Only
Employer Cost Sharing - Small Group Market (mostly) Only
The cost analysis above is based on the full retail cost of insurance, for the individual and small group markets. Both the individual market and group markets have cost offsetting features which can lower the actual cost you pay for insurance. In the individual market, based on income, you could qualify for a marketplace subsidy (Advanced Premium Tax Credit - APTC). A link to a useful calculator for estimating your potential subsidy is provided below.
Kaiser Health Insurance Marketplace Calculator (2018)
In the group market your employer usually will help share in the cost of your insurance by offering a "contribution", which is a company defined arrangement for lowering the actual amount you pay for group coverage.
An important note about subsidies - according to Federal Rules, if your employer is offering you coverage, you may not qualify for a subsidy.
Conclusion:
The overall retail cost of health insurance is cheaper in the Small Group Market, than in the individual markets. So, again at a high-level, the Small Group Market has lower prices and would likely be a better option, but the question cannot be completely settled without including the employer cost sharing arrangement (another knowledge word, "contribution", which refers to employer cost sharing arrangement) and potential subsidies, into the cost analysis.
Employer Incentives
Many employer plans have additional incentives that are conditioned on an employee's participation on the group plan. These can vary from employer to employer, and can also be quite broad. For example, some employers require you to participate on their HSA plan (Qualified High Deductible Health Plan) in order to receive HSA money. It's also becoming a much more common practice for employers to offer wellness incentives in the form of financial discounts on the cost of your group health plan, for participation on the group wellness plan.
Conclusion:
These incentives can be substantial, so it is highly advisable that you understand how these offerings work before making your decision. Your company HR, or employer is a good place to start.
Eligibility
Before it's sensible to have a serious discussion about what your best options are, we need to discuss what enrollment options you even have in the first place. Import note before you ever cancel coverage, be absolutely certain that you have Enrollment Eligibility rights under a new plan , otherwise you could end up uninsured. There are different enrollment rights for the individual and group markets, the tables below outline this.
There are two basic enrollment opportunities in the individual market:
Annual Open Enrollment
Special Enrollment
This table helps illustrate this:
*Qualifying life event are legally defined events, such as Marriage, birth of a child or adoption, divorce, etc, that trigger a special enrollment right.
Generally there are three enrollment opportunities under a group plan
Initial Enrollment
Annual Open Enrollment
Special Open Enrollment
Conclusion:
The important thing to highlight from these charts is that if you don't have an enrollment right to switch to either a group plan or individual plan, you should wait until you have such a right. The open enrollment windows for either markets is an ideal time.
Taxes
This also where I need to state that I'm not a tax expert, I'm not CPA, accountant, bean-counter, book-keeper, a bookie, or a card counter. So, I'm not giving tax advice...I'm just talking about taxes in a way that may or may not be interesting?
Group Plans: It will be helpful in the analysis to break pattern and talk about group plans first, as they are the easiest. The IRS has given employers a helpful tool called Section 125 Cafeteria Plans. Cafeteria plans are vehicles only offered through employer payroll systems, that allow employers and employees to share in the full tax advantage of subtracting certain expenses from salary, before payroll taxes are calculated.
Both employees and employers have tax liability for the salaries and wages paid to employees.
Employees Pay:
Federal Income
State Income
Social Security and Medicare (FICA) - technically enough, employees pay 50% of FICA
Employers Pay
State Unemployment Insurance (SUTA)
Federal Unemployment Insurance (FUTA)
Social Security and Medicare (FICA) - technically enough, the other 50%
When you purchase health insurance through your employer, and again, assuming your employer has set up a cafeteria plan, the amount you pay for health insurance (the amount paid by your employer is a tax write off to the company, and non-taxable to you) is subtracted from your salary before taxes are calculated. This lowers the amount you pay in taxes because under this strategy you are basing your salary on a smaller taxable income. Here, have some math:
Taxable income = Total Monthly Salary - employee cost for health insurance (* plus other benefits too)
**Taxable Income is less than your total monthly salary, which means your taxes will be less too!!
There's one catch to cafeteria plans however. You cannot receive a double tax benefit. If you participate in your company's group plan, you may not deduct those same health insurance premiums from your personal income tax filing at the end of the year.
Individual Plans: The tax treatment of individual plans is a bit more complex (remember, we are not addressing self-employed individuals in this article). Claiming a deduction for an individual plan, when you are not self-employed has the following requirements:
You must itemize your taxes in order to claim any kind of health insurance deduction. You cannot claim the health deduction if you take the standard deduction
You can only claim the total cost of premiums and qualified medical expenses which exceed 10% of your AGI for the given tax year - This one takes some time, have some more math:
*Assumes that health care expenses exceed 10% of your AGI
Taxable Income = AGI - [health care deductions - (0.1 * AGI)]
You can only claim an income tax deduction, there is no way to deduct for FICA taxes withheld from payroll.
State Income Tax rules vary - Check with your State
You can only claim amounts paid with after tax income. You cannot claim any double tax benefits
**A disclaimer worth ignoring!!**
Now, some of you reading this may be tempted to bring up the Qualified Small Employer HRA (QSEHRA, part of the 21st Century Cures Act). That's not the purpose of this article, I will cover that subject in the future...so for now I'll just say that if you even know what I'm talking about then... "you are possibly kind of right", and leave it at that for now(If I used smiley faces this is where I'd put one).
End of Disclaimer
Let's just look at a side by side scenario comparing these situations:
We'll take a hypothetical scenario of a person with an adjusted gross income of $73,000, who has the option of purchasing one of two equally priced health insurance products in either the individual or group markets. Then we'll evaluate the possible tax implications, all from the standpoint of a non-tax professional. Maybe just something of a tax enthusiast??
*Net = AGI - Insurance - Tax Total
Conclusion
From a taxes standpoint the analytical case is far more cut and dried. You receive a higher tax break by participating in group health plan, than by purchasing individual insurance.
Big Conclusion
In most cases your group plan will provide you with more opportunity to get "best" coverage. However the specifics matter, and the situation that would most likely warrant choosing an individual market option over your group option, would be if your employer has not chosen a strong plan offering. Still, in that case it is important to know that your employer is acting on advice from their benefits broker who may not be accounting for your needs. Working with your employer to help them understand what your needs are and helping them to improve their offering will afford you the full advantage of the group markets price, product volume, and tax advantages.
