12.4 Group vs. Individual Health and Eligibility
Key Takeaways
- Group health is issued to an employer/sponsor under a master contract; individuals receive a certificate of coverage, not a policy.
- Group underwriting evaluates the whole group, allowing guaranteed-issue and lower cost; individual underwriting evaluates each applicant.
- Eligible groups must form for a purpose other than buying insurance to prevent adverse selection.
- Eligibility hinges on actively-at-work and full-time status; enrollment uses initial, annual open, and special enrollment periods.
- COBRA continues group coverage up to 18/29/36 months, and HIPAA guarantees portability and bars pre-existing exclusions on most plans.
Group vs. Individual: Who Owns the Contract
In group health, the insurer issues a single master contract (master policy) to the group sponsor — usually an employer. Individual members are not policyowners; each receives a certificate of insurance describing benefits. In individual health, the applicant is the policyowner and holds the policy directly.
| Feature | Group | Individual |
|---|---|---|
| Contract holder | Employer / sponsor (master policy) | The insured (policy) |
| Document to insured | Certificate of coverage | The policy itself |
| Underwriting | Whole group; often guaranteed-issue | Each applicant individually |
| Cost per insured | Lower (spread risk, employer share) | Higher |
| Premium payment | Often shared employer/employee | Insured pays full premium |
Group Underwriting and Eligible Groups
Group underwriting evaluates the characteristics of the entire group — size, occupation, age/sex distribution, and prior claims — rather than each member's health. Larger groups can be issued on a guaranteed-issue basis with no individual evidence of insurability.
To control adverse selection, the group must be a bona fide group formed for a purpose other than obtaining insurance. Recognized eligible groups include:
- Employer (single-employer) groups — the most common.
- Multiple-Employer Trusts (METs) and MEWAs pooling small employers.
- Labor union (Taft-Hartley) groups.
- Trade and professional association groups.
- Creditor-debtor groups (group credit health).
To prevent adverse selection, insurers require a minimum participation percentage (for example, 75% of eligible employees for contributory plans, 100% for fully employer-paid noncontributory plans).
Eligibility and Enrollment Periods
Group eligibility usually turns on two standards:
- Actively-at-work provision — coverage begins only if the employee is actively performing job duties (not home sick) on the effective date.
- Full-time status — typically a minimum hours threshold (commonly 30 hours/week under the ACA), after any probationary (waiting) period (max 90 days under the ACA).
Enrollment Windows
| Period | When it applies |
|---|---|
| Initial enrollment | When first eligible (after the waiting period) |
| Annual open enrollment | Once a year; any eligible person may join without evidence of insurability |
| Special enrollment | Triggered by a qualifying life event (marriage, birth/adoption, loss of other coverage) |
| Late enrollment | After eligibility lapses; may require evidence of insurability or face a delay |
Trap: A noncontributory plan (employer pays 100%) requires 100% participation, which eliminates adverse selection; a contributory plan (employees share cost) requires a high but lower threshold such as 75%.
Federal Overlay: COBRA and HIPAA
Two federal laws dominate group continuation and portability questions:
COBRA (Consolidated Omnibus Budget Reconciliation Act) lets covered employees and dependents continue group coverage at their own cost (up to 102% of the group premium) after a qualifying event. It applies to employers with 20+ employees.
| COBRA qualifying event | Continuation period |
|---|---|
| Termination (not gross misconduct) or reduced hours | 18 months |
| Disability during the first 60 days of COBRA | 29 months |
| Death, divorce, or loss of dependent status | 36 months (dependents) |
HIPAA (Health Insurance Portability and Accountability Act) guarantees portability of coverage between group plans, limits pre-existing condition treatment (and, under the ACA, such exclusions are largely prohibited on individual and small-group plans), and protects the privacy of health information (PHI). A certificate of creditable coverage historically documented prior coverage to reduce or eliminate waiting periods.
Tax Treatment and Conversion
The tax rules differ sharply between group and individual health and are heavily tested:
| Situation | Tax result |
|---|---|
| Employer pays group medical premiums | Deductible to employer; not taxable income to the employee |
| Employee pays own individual medical premiums | Generally not deductible unless itemized medical exceeds the AGI threshold |
| Medical expense benefits received | Tax-free to the insured (reimbursement of cost, not income) |
| Self-employed individual's own premiums | May be deductible above the line |
Most group plans include a conversion privilege: a terminating employee may convert to an individual policy without evidence of insurability, typically within 31 days, though benefits and premiums differ. Conversion and COBRA are alternatives - COBRA continues the same group plan for a set period, while conversion moves the insured to a permanent individual contract. A producer should compare cost and coverage before recommending either path.
A 22-employee company terminates an employee for reasons other than gross misconduct. Under COBRA, how long may the former employee continue the group health coverage at his own expense?
Why must an eligible group be formed for a purpose other than obtaining insurance?
Worked Scenario: Enrollment Periods and Late Entrants
Group eligibility hinges on enrollment timing. The initial enrollment period lets a newly eligible employee join (often a 30-31 day window) without underwriting. Miss it and the person becomes a late enrollee, who may face evidence of insurability or a waiting period. An open enrollment period (typically annual, ~2-4 weeks) lets employees add or change coverage without proof of insurability. A special enrollment period opens on a qualifying event (marriage, birth/adoption, loss of other coverage).
Scenario: an employee declines coverage at hire because they have a spouse's plan, then loses that plan when the spouse changes jobs. Loss of other coverage is a qualifying event, opening a 30-day special enrollment to join the group plan without late-entrant underwriting. Had they simply changed their mind with no qualifying event, they would wait for open enrollment or submit evidence of insurability as a late enrollee.