Do You Have to Take Insurance From Your Employer?

Voluntary Nature of Employer-Sponsored Health Insurance

Employees are not legally required to enroll in health insurance plans offered by their employers; the decision to accept or decline coverage is voluntary. Employer-sponsored insurance is the most common source of private health coverage in the United States, covering over 164 million people in 2023.

Employers offer health insurance as a tool for attracting and retaining talent. Competitive benefits packages, including health coverage, are valued by job seekers and can increase employee satisfaction and loyalty. Providing health insurance can also lead to a healthier, more productive workforce, as employees are more likely to seek preventive care.

Employers gain tax advantages by offering health insurance. Premiums paid by employers for employee health insurance are tax-deductible as a business expense, reducing the company’s taxable income. Employee contributions to premiums, when made through a Section 125 cafeteria plan, are excluded from their taxable income, reducing payroll taxes for both employer and employee.

While no federal law mandates all employers to provide health insurance, the Affordable Care Act (ACA) includes provisions for Applicable Large Employers (ALEs). An ALE, defined as an employer with 50 or more full-time or full-time equivalent employees, must offer affordable health insurance that provides minimum essential coverage to at least 95% of their full-time employees and their dependents up to age 26. Failure to meet this “employer mandate” can result in IRS penalties if any full-time employee receives a federal premium subsidy through the Health Insurance Marketplace.

Alternative Health Coverage Options

If an individual declines employer-sponsored health insurance, alternative options exist. One common option is to secure health insurance through a spouse’s employer-sponsored plan, as many employer plans allow for the enrollment of spouses and dependents.

The Health Insurance Marketplace is another alternative. This online platform allows individuals and families to compare and purchase health insurance plans. To be eligible for Marketplace coverage, individuals must reside in the United States, be a U.S. citizen or lawfully present, and not be incarcerated. Plans available on the Marketplace provide “minimum essential coverage,” which includes a range of essential health benefits.

Government programs also offer health coverage. Medicaid provides health coverage to low-income individuals, families, pregnant women, children, and people with disabilities, with eligibility based on Modified Adjusted Gross Income (MAGI). Medicare primarily serves individuals aged 65 or older, certain younger people with disabilities, and those with End-Stage Renal Disease.

Key Factors When Deciding on Employer Coverage

Evaluating whether to accept employer-sponsored health insurance or pursue an alternative involves comparing several factors. A first step is a cost comparison, including premiums, deductibles, copayments, and out-of-pocket maximums. Premiums are regular payments for coverage. A deductible is the amount paid out-of-pocket for covered services before insurance begins to pay. Copayments are fixed amounts for specific services, and the out-of-pocket maximum is the annual cap on what an individual pays for covered services, after which the plan covers 100% of costs.

The employer’s contribution to premiums represents a financial benefit foregone if the plan is declined. Employers often contribute a portion of the premium cost, which is a tax-exempt benefit for the employee. This employer subsidy can make the employer’s plan more affordable than an equivalent plan purchased independently.

Considering the plan’s network and coverage is important. This involves assessing the availability of preferred doctors and specialists, the type of plan (e.g., Health Maintenance Organization (HMO) or Preferred Provider Organization (PPO)), and coverage for prescription drugs and specific medical needs. HMOs limit coverage to a specific network and may require referrals for specialists, while PPOs offer more flexibility to see out-of-network providers at a higher cost.

Tax implications play a role in the decision, regarding eligibility for premium tax credits on the Health Insurance Marketplace. Individuals may qualify for these subsidies if their household income falls within certain levels and if the employer’s plan is “unaffordable” or does not provide “minimum value.” For 2024, employer-sponsored coverage is considered affordable if the employee’s share for self-only coverage does not exceed 8.39% of their household income. A plan provides minimum value if it covers at least 60% of the total allowed costs of benefits and includes substantial coverage for physician and inpatient hospital services. If an employer’s plan meets these affordability and minimum value standards, an employee cannot receive Marketplace subsidies.

Finally, Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage offers a temporary option for individuals to maintain their employer-sponsored health plan after certain qualifying events, such as job loss. COBRA allows for continuation of the same coverage for a limited period, but the individual must pay the full premium, plus an administrative fee, which can be more expensive than active employee premiums.