How does employer-sponsored health insurance work?

The basics in four steps

• The employer chooses one or more plans and sets eligibility rules, such as full-time employees working 30 or more hours a week and their dependents.
• The employer pays a share of the premium, 84% for single coverage on average, and employees pay the rest through payroll, usually pre-tax through a Section 125 plan.
• Employees enroll when hired, at open enrollment or after a qualifying life event such as marriage or a birth.
• Members use the plan's network and pay deductibles, copays or coinsurance when they get care; see deductible, copay and coinsurance explained.

Who pays what: the 2025 averages

How the plan is funded

In a fully insured plan, a carrier takes the risk for a fixed premium. In a self-funded plan, the employer pays claims directly, usually with stop-loss insurance against large claims. Level-funded plans sit in between: a fixed monthly payment that funds expected claims, with a possible refund or a higher renewal depending on how the year went. Which one you choose decides who keeps unspent money and how renewals are priced; see level-funded vs. self-funded vs. fully insured.

Plan types sit on top of the funding model. In 2025, 46% of covered workers were in PPOs, 33% in high-deductible plans with a savings option, 12% in HMOs and 9% in POS plans (KFF). See HMO vs. PPO vs. EPO and HDHP vs. copay plans.

What every employer plan has to cover

Federal law sets a floor for non-grandfathered group plans. Small group insured plans must also cover all ten essential health benefits; large and self-funded plans choose their benefits but follow the rest of the list.

• Preventive care with no cost sharing: recommended screenings, vaccines and well visits in network, with no deductible, copay or coinsurance. See preventive care covered free.
• An out-of-pocket maximum: in-network cost sharing for essential benefits is capped at $10,600 for self-only and $21,200 for family coverage in 2026, rising to $12,000 and $24,000 in 2027. Most employer plans set it well below the cap.
• No annual or lifetime dollar limits on essential health benefits the plan covers.
• Dependents up to age 26 if the plan offers dependent coverage.
• No pre-existing condition exclusions and no premiums based on an individual's health.
• Mental health parity for plans subject to MHPAEA or related EHB parity rules, with applicable exceptions; see mental health benefits.
• Surprise billing protections for emergency care and for out-of-network clinicians at in-network hospitals, under the No Surprises Act (2022).

Eligibility and enrollment rules employers must follow

• Waiting periods: you can make new hires wait before coverage starts, but a waiting period cannot exceed 90 days once the person is otherwise eligible. Separate permissible eligibility or variable-hour measurement rules can affect when that period begins.
• Participation and contribution: small group carriers usually require a minimum share of eligible employees to enroll (employees with other coverage often don't count against you) and a minimum employer contribution. If you can't meet them, federal rules still let you buy small group coverage during an annual window from November 15 to December 15.
• Same rules for similar employees: eligibility and contributions should follow classes like full-time and part-time, not individual choices. Self-funded plans can't favor highly paid employees under tax nondiscrimination rules (section 105(h)); the ACA's similar rule for insured plans is not yet enforced.
• Special enrollment: employees who marry, have a child or lose other coverage can enroll mid-year, generally within 30 days (60 days for Medicaid or CHIP changes).
• Owners: sole proprietors and partners are treated differently from W-2 employees for tax purposes. If the only people on the plan are owners and their spouses, it may not count as a group plan; ask your carrier.

What the employer has to do once the plan exists

In a fully insured plan the carrier typically administers insured claims and networks; the employer still must allocate and oversee its own enrollment, disclosure and compliance responsibilities. In a level-funded or self-funded plan, the employer is legally the plan sponsor and fiduciary, even when a third-party administrator does the work. A PEO takes on much of this paperwork in exchange for its fees; see how to leave a PEO if you outgrow one.

Common mistakes small employers make

• Reimbursing individual premiums informally. Paying employees back for their own individual policies outside a QSEHRA or ICHRA is an "employer payment plan" under IRS Notice 2013-54 and can trigger excise taxes of $100 per day per affected employee. Unconditional taxable pay that is not tied to buying insurance is different; merely taxing a premium reimbursement does not necessarily cure an employer payment plan.
• Taking payroll deductions without a Section 125 plan document. Without one, employee contributions are technically after-tax.
• Inconsistent eligibility. Offering coverage to one part-time employee but not another in the same role creates discrimination and carrier problems.
• Forgetting COBRA or state continuation notices when someone leaves. Penalties and claims liability can follow.
• Covering contractors on the group plan. Group plans are for employees; see health insurance for contractors.

How a small company sets up a plan

1. Decide budget and eligibility (week 1) Pick a contribution (for example, 80% of employee-only and 50% of dependents) and who's eligible. Check what your payroll provider supports.
2. Get quotes across funding models (weeks 1–3) Compare fully insured, level-funded, PEO and ICHRA options on the same census. A broker can help, or you can go direct.
3. Collect employee information and apply (weeks 3–5) Carriers need a census and sometimes a health questionnaire for level-funded quotes. Most small group plans start on the first of a month.
4. Run enrollment (2 weeks before start) Explain the plan, collect elections and waivers, and set up pre-tax payroll deductions under a Section 125 plan.
5. Go live and keep it compliant Send required notices, track new hires and waiting periods, offer COBRA when people leave, and review at each renewal.

Where Prescience fits

At Prescience, we design and run your company's health plan, from setup and enrollment to claims, compliance and COBRA. What your team gets:

• An effective $0 deductible, so the plan helps from the first visit.
• Simple copays shown before a visit, capped by a low out-of-pocket maximum.
• A broad national PPO network, plus providers we contract with directly.
• 24/7 physician-led care navigation: a care team that finds the right provider, books appointments and explains costs up front.

What your company gets: one monthly cost set in your quote, usually 10–20% below comparable fully insured coverage and fixed before the plan starts, with no admin fees. You keep your payroll provider, and the plan can start mid-year.