Group Health Insurance Options

While all these health plans have certain advantages and disadvantages, it’s up to you to decide which makes the most sense for your needs. Here are some of the common types of group health insurance options available for small businesses.

Fully-Insured Plans

Of all the types of group health insurance, the fully-insured plan is one of the more traditional options. Fully-insured plans involve the insurance company taking on the risks involved with healthcare costs and charging your business an annual premium for the benefits in the insurance policy, which is partially paid for by the employees. 

The insurer uses a variety of factors used to calculate group health insurance premiums, including:

• Size and health of the group
• Average age of the group
• The employer’s claims history
• Types of occupation
• Level of coverage and add-on benefits

Pros and Cons of Fully-Insured Health Plans

At first glance, fully-insured health plans may appear to be the easiest option. However, they do have their share of disadvantages. Here are some key considerations when it comes to fully-insured plans.

• Pro: The monthly costs are predictable. The employer pays set premiums, making it easy to budget for the year, even if claims are higher than expected.
• Pro: These plans may require minimal administrative work on the part of the employer. Other than open enrollment and premium deductions, the insurance provider or benefits broker may handle the work of administering the plan.
• Con: Employers don’t have much control over plan design. Since the insurance company decides on the plan design, employers may be unable to offer coverage that caters to the needs of their workers.
• Con: If claims are lower than expected, the insurance company might benefit, but the employer will not receive any money back.

Self-Funded Plans

While the insurance company covers the expense of employee health costs in a fully-insured plan, self-funding places that burden on the employer. This can often lead to more affordable rates and more control over a plan, with the tradeoff of your business accepting the risk of having to pay for any catastrophic claims. 

This path is often seen as an option for large businesses, but small groups can also take advantage of self-funded plans. Small businesses can opt for a partially self-funded plan with stop-loss insurance. This option limits your risk so that you can still reap some of the benefits of self-funding without taking on the entire burden in case any catastrophic claims occur.

Level-Funded Plans

Unlike the more traditional plans with annual premiums, level-funded plans are based on a monthly payment rate. Insurance carriers will use census information to determine the amount your small group should pay. This rate is based on factors like claims allowances, fees, and stop-loss coverage premiums. Once the year is finished, the carrier will adjust the monthly level based on group performance.

Pros and Cons of Self-Funded and Level-Funded Plans

Many employers turn to self-insurance because it means they could save money while exercising greater control over their employee benefits. Just like fully-funded health plans, self-funded and level-funded health plans have both pros and cons.

• Pro: Employers may have more control over plans and are more easily able to design coverage that meets the needs of their workers.
• Pro: If employers succeed in managing costs by achieving lower-than-expected claims, they may receive a refund from the surplus of funds.
• Pro: Employers may have access to data, which they can use to identify loss drivers and improve risk management.
• Pro: Self-funded plans may not be subject to the state health insurance regulations that govern fully-funded plans. This may decrease the regulatory burden and contribute to cost savings.
• Con: Self-funded employers must typically comply with HIPAA regulations, which may add a layer of regulatory burden.
• Con: Employers may need to take on more work. Although a benefits broker or third-party provider can assist in handling administration, the employer may still need to be more involved due to the responsibility of paying claims.
• Con: Employers may take on more risk. With a self-funded health plan, monthly costs are variable and may end up being higher than anticipated.

Controlling Financial Risk with Self-Funded Plans

Cancer, pregnancy, musculoskeletal disorders and other health conditions could all lead to major costs for both the employee and the employer. If a higher-than-average number of covered individuals have health conditions in one year or a single individual has an extremely expensive condition, claims costs may spike. Even routine costs can add up when they involve expensive tests and prescriptions.

When employers opt for self-insurance, they take on this risk themselves and may be motivated to keep costs down. Companies that use level-funding may also be motivated to keep claims costs low in order to receive a refund.

It may be possible to control financial risk with the use of stop-loss coverage. This excess insurance can help to cover claims that exceed a pre-determined level. Since both individual catastrophic claims and numerous lower-value claims may cause a financial burden, catastrophic and aggregate stop-loss coverage can provide important protection.

In addition to stop-loss insurance, employers could leverage various cost containment measures, such as:

• Implementing prior authorization and similar controls to potentially avoid unnecessary costs
• Educating employees on how to shop around for medical services and prescriptions
• Offering low-cost telehealth options
• Working with an employee benefits broker to get year-round, comprehensive support

Health Maintenance Organization (HMO)

An HMO is a group coverage setup where group members pay for specific health services through monthly premiums. Through an HMO, you’ll have access to a network of healthcare providers and locations, but services will be limited to those that fall under that network. This arrangement allows HMOs to be more affordable than other types of health insurance plans, although seeing any physicians or facilities not included in your HMO network can result in a group member having to foot the full bill.

Preferred Provider Organization (PPO)

PPO plans are like HMO plans, except with more flexibility. PPOs feature a network of healthcare providers and facilities, but group members have the option to go to physicians or locations without being completely on the hook for the entire bill. Instead, these visits will result in higher co-pays and additional service costs, giving members some more freedom than HMO plans.

High-Deductible Health Plan (HDHP) with a Savings Option (HDHP/SO)

An HDHP is based around lower premiums and higher deductibles for group members. This means that members with this type of healthcare insurance will have to pay more out-of-pocket before the plan pays for its share. The tradeoff, however, is that this route allows monthly premiums to be lower, making it a good group health insurance option for employees who don’t use many medical services. 

In addition, HDHPs can be paired with savings options like a health savings account (HSA). These accounts allow members to make tax-free contributions to an account that can be used to pay for healthcare costs, ranging from copays to major medical services. The funds in these accounts rollover every year, making them a great retirement savings option, too.

Health reimbursement accounts (HRAs) are another potential savings option that can be tied to an HDHP. These accounts are similar to HSAs, except employers make the contributions instead of employees.

Which option is right for your company?

While plenty of companies choose self-funding, it may not be the right option for everyone. If you’re thinking about an alternative to fully-funded plans, consider the following:

• How big is your company? Bigger companies have more resources and may be equipped to handle more variation in month-to-month costs. This is one reason why self-funding is more popular with large companies. If your company is small, self-funding may not match your needs and risk appetite. However, level-funding may be a viable alternative.
• How effectively can you control costs? Self-funded health plans may provide employers with access to data, which they can leverage to identify losses and then work alongside benefits professionals to implement changes to control costs. If this sounds like something your company could do successfully, self-funding or level-funding may be a good option.
• Are other options a better fit? For example, small businesses might consider an individual coverage health reimbursement arrangement (ICHRA) or Small Business Health Options Program (SHOP). The SHOP program through the Marketplace has been discontinued in Florida since 2024.

Since the health plan a company offers can impact both its expenses and employee satisfaction, making the right choice is critical. Higginbotham can help you explore your options, including self-funded, fully-funded and level-funded health plans

What are HSAs and FSAs?

Health savings accounts (HSAs) and flexible spending accounts (FSAs) both let you set aside money before it's been taxed to pay for health care costs. Any withdrawals are also tax-free, provided you use them to cover qualified medical expenses.¹ This can help increase the money you have available to pay for medical bills.

For instance, someone in the 22% federal income tax bracket could potentially save nearly 30% in taxes (federal income + FICA + potentially state income) on every dollar contributed to an FSA or HSA via payroll deductions

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HSAs and FSAs are generally offered by employers as part of benefits packages, though you may be able to open an HSA on your own if you have an HSA-eligible health plan through work, spouse's employer, private insurance, or the insurance marketplace. In that case, you'd be able to deduct any HSA contributions you make from your annual tax return, though these contributions may not avoid Medicare and Social Security taxes.

FSA vs HSA: Key differences

Outside of the similarities, FSAs and HSAs differ in a few important ways:

You can carry over unused HSA funds HSAs allow you to carry money forward indefinitely, so your funds are there for you year after year. This can make things easier if you happen to contribute more than you're able to spend in a year—you won't have to rush to buy Band-Aids, or glasses before your money expires. But it's especially helpful in building savings to pay for large, future medical expenses, like those you anticipate having in retirement.

FSAs, meanwhile, are generally "use it or lose it." This means that when the new benefit year begins, you may forfeit whatever funds remain in the account from the prior year. Some employers may allow you to carry forward a small amount of your unused balance or can offer a grace period (normally up to 2.5 months). Check with yours to see if you can carry over a portion of your FSA at year end.

You can invest the money in your HSA Unlike with an FSA, you can potentially grow any money you have in your HSA by investing it. This lets you position your funds to benefit from compound interest. Combined with the ability to carry over funds from year to year, you may be able to build up a nest egg to pay for qualified medical expenses. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2023 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement. An average individual may need $157,500 saved (after tax) to cover health care expenses in retirement.

You can decide how much or little you want to invest in your HSA. Some people invest all of the funds they hold; others prefer to save some—or all of their—cash for current expenses. It's your account, so it's your decision.

Whether you can open an FSA depends on your employer; HSAs are determined by your health insurance To be eligible for an HSA, you must be enrolled in an HSA-eligible high-deductible health plan and not have other disqualifying health coverage. Ask your benefits provider if you aren't sure which kind you have. FSAs, on the other hand, are employee benefits that anyone can contribute to as long as they are eligible and their employer offers them.

Can you have an HSA and FSA?

If you're contributing to an HSA, you can't fund just any type of FSA in the same year. You can have an HSA along with a limited purpose FSA, also known as an LPFSA. This type of FSA covers only those expenses not covered by your health plan, such as dental and vision care.

Note: This does not impact the ability to have a dependent care FSA.

You may be able to contribute more to an HSA than an FSA Both HSAs and FSAs have maximum annual amounts you can contribute, which the IRS determines each year. Employers can also determine FSA limits for their plans.

For 2023, the IRS contribution limits for health savings accounts (HSAs) are $3,850 for individual coverage and $7,750 for family coverage. For 2024, The IRS contribution limits for HSAs are $4,150 for individual coverage and $8,300 for family coverage. If you're 55 or older during the tax year, you may be able to make a catch-up contribution, up to $1,000 per year. Your spouse, if age 55 or older, could also make a catch-up contribution, but will need to open their own HSA. For FSAs in 2023, the maximum contribution is $3,050. This rises to $3,200 in 2024.

If your employer contributes to your HSA or FSA on your behalf, this may impact how much you can contribute. To find out more, check out our guide to HSA contribution limits.

Your HSA belongs to you, not your employer Even if you opened it through your company, your HSA (and everything inside of it) is yours forever—even if you leave your job. You can even use HSA funds to cover COBRA costs and health insurance premiums if you need to when you're unemployed. FSAs, however, are owned by your company, though you may contribute your own money to them. If you leave your job, you forfeit all funds in the account upon your departure.

You may have access to your FSA funds earlier in the year FSA funds are available to spend in their entirety at the beginning of your plan year. So if you decide to contribute $3,050 to your FSA in 2023, that entire amount is there for you to spend on the first day your benefits begin.

HSA contributions, on the other hand, accumulate only as you contribute. If you plan to save $3,050 over the year, you may only have access to half of that by the end of June, which may make it harder to cover significant expenses. However, HSAs let you reimburse yourself for any qualified medical expenses, which can make them effectively work the same way as FSAs.

For example, let's say you charge a $1,200 medical bill to your credit card because you don't have enough funds in your HSA. You can pay yourself back when your HSA balance grows enough to cover the cost.

At 65, you can treat an HSA like a traditional 401(k) or IRA To avoid a 20% penalty—plus any applicable taxes—you should only use money held in FSAs and HSAs for qualified medical expenses. But starting at 65, the 20% penalty is waived for HSAs, making them effectively like traditional 401(k)s or individual retirement accounts (IRAs). If you choose to use HSA funds for ineligible expenses at age 65 or older, you will still owe any applicable income taxes on what you take out.

HSA vs. FSA: Which is better?

If you're eligible for both an HSA and FSA, be sure to carefully weigh each option, considering the pros and cons we've outlined above. The choice of FSA vs. HSA (or HSA plus limited purpose FSA) comes down to your personal financial situation as well as your and your family's health.

And if you don't have a choice between FSAs and HSAs due to your health plan or company's offerings, don't worry about which account may be optimal. Both HSAs and FSAs are great options for saving money to pay for qualified medical expenses.