Individual vs. Group Health Insurance: What's the Difference?

Individuals in the United States obtain health insurance in one of two ways. All applicable large group employers that employ 50 people or more must offer health insurance as a result of the Obama administration’s passage of the Affordable Care Act (ACA) in 2010. Alongside group mandates, the ACA created individual exchanges that require participation of all Americans who are ineligible for group policies or who do not derive health benefits from governmental programs such as Medicare or Medicaid.

The ACA, known colloquially as Obamacare, requires that all individuals who work 30 hours or more per week in a designated measurement period are eligible to receive health insurance coverage. The benefits offered to employees must meet the ACA’s definition of minimum value. This value is calculated actuarially and measures the richness of benefits, along with member liabilities, such as copays and deductibles. The resultant value must fall between 60 and 100%, with higher ranges corresponding to more valuable plans.

Along with being valuable, group plans must meet the ACA’s affordability minimums. Premium contributions required by employers for single contract coverage cannot exceed 9.66% of the lowest-paid employee’s wages. If a single employee earning $20,000 annually obtains coverage and is required to make contributions, those premium payments may not exceed $1,932 per year. It is important to note that this calculation only applies to the cost of single coverage, even if the employee obtains a plan that covers family members.

A third measure that groups must meet is an offer of minimum essential coverage (MEC) to "substantially all" employees that meet eligibility requirements. MEC is defined as plans that are offered through an employer, government entities and the individual marketplace. To meet the substantially all requirement, employers must make an offer of coverage to 95% of all full-time employees.

Noncompliance with ACA minimum value and affordability guidelines can be costly for employers. There is a penalty for employers who fail to offer coverage that does not meet affordability or minimum value standards. Dubbed the "pay or play" penalty, employers are fined $3,240 in 2016 for each full-time employee that obtains coverage and subsequent premium tax credits through the individual exchange market. Sidestepping the substantially all standard invites fines of $2,160 per incident.

Individuals are also required by the ACA to obtain health insurance. Plans offered through the exchange marketplace are ascribed metal levels of platinum, gold, silver and bronze actuarial values, with higher premiums, richer benefits and less out-of-pocket expense at the platinum mark. Unlike group policies, individual plans are rated by age, smoking status and geographic location. Fully insured group plans are rated on claims experience and rates for self-insured group plans are determined actuarially, but groups have discretion over rates and contribution levels.

Federal and state exchanges offer premium tax credits to policyholders whose incomes fall between 100 and 400% of the federal poverty level (FPL). For a family of four, 400% of the FPL was $95,400 in 2015. Group health subscribers do not receive federal tax credits but, to attract and retain key employees, most employers subsidize a large portion of premiums charged by carriers or established premium equivalent rates in the case of self-funded groups. Groups that utilize an Internal Revenue Service (IRS) section 125 or cafeteria plan, however, do allow premium contributions to be made with pretax dollars. Individual exchange premiums are not tax deductible unless they, along with other medical and dental expenses, exceed 10% of adjusted gross income.

Penalties also apply to individuals who remain uninsured. In 2015, the penalty was $325 per uninsured person, or 2% of household income over the filing threshold. While employers were required to file information regarding covered employees on Form 1095-C for 2015, individuals were only asked to self-report when filing taxes, with no proof of coverage required for submission to the IRS.