12.4 Group vs. Individual Health and Eligibility
Key Takeaways
- Group coverage uses a master policy to the employer plus certificates to insureds, underwrites the group as a whole, and costs less per person than individual coverage.
- Non-contributory plans require 100% participation; contributory plans typically require 75%, both to limit adverse selection.
- Eligibility, enrollment, open enrollment, late-enrollee, and special enrollment period rules govern when coverage can begin without evidence of insurability.
- The ACA bars pre-existing condition exclusions and lets dependents stay covered to age 26.
- COBRA continues the same group coverage at up to 102% of cost (18/29/36-month maximums by event); conversion moves to an individual policy without proof of insurability.
The Group Contract Structure
In group health insurance, the master contract (master policy) is issued to the policyholder—usually an employer, association, or trust—while each covered employee receives a certificate of insurance evidencing coverage. The employee is the insured, but the employer is the contracting party. This structure produces lower per-person cost than individual coverage because risk is spread across the group and group underwriting evaluates the group as a whole rather than each individual.
Groups must be formed for a purpose other than obtaining insurance to avoid adverse selection. Eligible groups include single employers, multiple-employer trusts (METs), labor unions, and qualifying associations.
Group vs. Individual — Side by Side
| Feature | Group | Individual |
|---|---|---|
| Contract | Master policy + certificates | One policy to the insured |
| Underwriting | Group as a whole (often little individual evidence) | Each applicant individually |
| Cost | Generally lower per person | Generally higher |
| Premium tax (employer-paid) | Employer deducts premium; benefits generally tax-free | Individual premiums usually not deductible (subject to thresholds) |
| Continuation | COBRA/state continuation, conversion | Owned by the individual; portable |
| Renewability | Master policy renewed by group | Governed by the policy's renewal provision |
Group plans typically require non-contributory (employer pays 100%, so 100% participation) or contributory (employees share cost, so commonly 75% participation) enrollment to limit adverse selection.
Eligibility, Enrollment Periods, and Probationary Rules
Tested enrollment concepts:
- Eligibility (waiting/probationary) period — time a new employee must wait before coverage begins.
- Enrollment period — a window (often ~31 days) to elect coverage without proof of insurability.
- Open enrollment — periodic windows to join or change plans.
- Late enrollee — someone who declines initial enrollment and applies later may face evidence of insurability or a waiting period.
- Special enrollment period (SEP) — triggered by qualifying life events (marriage, birth/adoption, loss of other coverage), allowing enrollment outside open enrollment.
Under the Affordable Care Act, group and individual plans cannot deny coverage or charge more for pre-existing conditions, and dependent children may stay on a parent's plan to age 26.
Continuation: COBRA and Conversion
When group coverage would otherwise end, federal COBRA (Consolidated Omnibus Budget Reconciliation Act) lets qualified beneficiaries continue the same group coverage by paying the premium (up to 102% of the group cost, the extra 2% for administration). COBRA generally applies to employers with 20 or more employees.
| COBRA qualifying event | Maximum continuation |
|---|---|
| Termination (not gross misconduct) or reduced hours | 18 months |
| Disability extension (SSA-determined) | up to 29 months |
| Divorce, death of employee, loss of dependent status, Medicare entitlement | up to 36 months |
Worked numeric: a terminated employee whose group premium was $600/month pays COBRA at up to 102% = $612/month. Separately, a conversion privilege may let a departing insured convert to an individual policy without proving insurability, though at individual (usually higher) rates.
Taxation of Group Health Premiums and Benefits
Group health taxation is a reliable exam topic. When an employer pays group medical premiums, the premium is generally tax-deductible to the employer as a business expense and is not taxable income to the employee. Benefits paid for medical expenses are likewise received tax-free by the employee. This favorable treatment is a major reason group coverage dominates the employer market.
Individual medical-expense premiums are generally not deductible by the policyowner unless total unreimbursed medical costs exceed the IRS percentage-of-AGI threshold and the taxpayer itemizes. The key contrast for the exam: employer-paid group medical premiums are deductible to the employer and tax-free to the employee, whereas individually purchased medical premiums usually receive no deduction. Note that disability income benefits follow a different rule—if the employer paid the premium and did not include it in income, the benefits are taxable; if the employee paid with after-tax dollars, the benefits are tax-free.
Renewability Provisions on Individual Health Policies
Individual health policies carry a renewability provision that controls the insurer's right to change or cancel coverage. From most to least favorable to the insured:
| Renewability | Insurer's rights |
|---|---|
| Noncancelable | Cannot cancel, cannot raise the premium; guaranteed to a stated age |
| Guaranteed renewable | Must renew, but may raise premium by class (not individually) |
| Conditionally renewable | May refuse renewal only for stated conditions |
| Optionally renewable | May refuse renewal or raise rates on a policy-anniversary/premium-due date |
| Cancelable | May cancel anytime with required notice |
The memory hook: noncancelable = rate AND renewal locked; guaranteed renewable = renewal locked, rate can rise. Conflating these two is the single most common renewability error on the exam.
Group health coverage uses a different durability concept: the master policy renews at the group level, and individual employees gain or lose coverage based on eligibility rather than personal renewability. This is why a departing employee relies on COBRA continuation or the conversion privilege rather than an individual renewability clause to keep protection in force.
Under a contributory group health plan, what is the typical minimum participation requirement, and why does it exist?
An employee is terminated (not for gross misconduct) from a 200-employee company with a $600 monthly group premium. Under COBRA, what is the maximum continuation period and premium?