# How does employer-sponsored health insurance work?

Source: https://www.getprescience.com/guides/how-does-employer-sponsored-health-insurance-work
Author: Aditya Jain, MD, Cofounder and COO, Prescience
Published: 2026-11-07
Updated: 2026-11-07
Cite as: Aditya Jain, MD. "How does employer-sponsored health insurance work?." Prescience, November 7, 2026. https://www.getprescience.com/guides/how-does-employer-sponsored-health-insurance-work

An employer picks a health plan, pays most of the premium, and offers it to eligible employees and their families. In 2025 the average employer paid average shares of 84% for single and 74% for family coverage, with average total premiums of $9,325 and $26,993 respectively (KFF). Eligible employer contributions generally receive favorable federal tax treatment, subject to exceptions for some owners and dependents. Behind that simple picture are very different ways of funding and running the plan, and they decide what your team pays and gets.

- **Coverage through work:** 53.8% of Americans (2024)
- **Employer share, single:** 84% on average
- **Tax treatment:** Tax-free to employees
- **Funding models:** Fully insured, level-funded, self-funded

## 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](https://www.getprescience.com/guides/section-125-pre-tax-health-insurance).
- Employees enroll when hired, at [open enrollment](https://www.getprescience.com/guides/how-to-run-open-enrollment) or after a [qualifying life event](https://www.getprescience.com/guides/qualifying-life-events) 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](https://www.getprescience.com/guides/deductible-copay-coinsurance-explained).

## Who pays what: the 2025 averages

**Average annual premiums and contributions, KFF 2025 Employer Health Benefits Survey**

|  | Single coverage | Family coverage |
| --- | --- | --- |
| Total premium | $9,325 | $26,993 |
| Employer pays | $7,885 | $20,143 |
| Worker pays | $1,440 | $6,850 |
| Growth from 2024 | 5% | 6% |

**A 10-person company at national average premiums**

Illustrative. 7 employees take single coverage and 3 take family coverage. The company contributes the KFF 2025 average share for each tier. Real premiums depend on age, location, plan and funding model. This is a hypothetical census using survey averages, not a quote. Payroll-tax savings assume all relevant wages remain below the Social Security wage base and that ordinary employee exclusions apply.

- Total premiums (7 × $9,325 + 3 × $26,993): $146,254 a year
- Employer pays (7 × $7,885 + 3 × $20,143): $115,624 a year ($9,635 a month)
- Employees pay (7 × $1,440 + 3 × $6,850): $30,630 a year, pre-tax
- Employer payroll tax saved vs. paying the same as wages (7.65%): About $8,845 a year

The illustrative employer contribution is $115,624 annually, or $11,562.40 per enrolled employee. Federal tax treatment generally favors eligible health benefits, but deductibility and payroll treatment depend on the employer, owner status and covered person. KFF’s 2025 survey covers firms with at least 10 workers and is a benchmark, not a rate offer.

## 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](https://www.getprescience.com/guides/level-funded-vs-self-funded-vs-fully-insured).

**Ways an employer can provide health coverage**

| Model | Who carries claims risk | Typical fit | Measurement caution |
| --- | --- | --- | --- |
| Fully insured group plan | Carrier | Small and mid-size employers wanting a fixed cost | Compare contract terms; categories and survey populations can overlap |
| Level-funded | Employer, up to a stop-loss limit | Healthier small and mid-size groups | Compare contract terms; categories and survey populations can overlap |
| Self-funded | Employer, usually with stop-loss | Large employers | Compare contract terms; categories and survey populations can overlap |
| PEO | Usually the PEO's carrier plan | Companies wanting HR, payroll and benefits bundled | Compare contract terms; categories and survey populations can overlap |
| ICHRA or QSEHRA | Each employee's individual insurer | Remote or dispersed teams, fixed budgets | Compare contract terms; categories and survey populations can overlap |

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](https://www.getprescience.com/guides/hmo-vs-ppo-vs-epo) and [HDHP vs. copay plans](https://www.getprescience.com/guides/hdhp-vs-copay-plan).

## 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](https://www.getprescience.com/guides/what-are-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](https://www.getprescience.com/guides/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](https://www.getprescience.com/guides/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.

> **Employers with 50 or more full-time equivalents:** An applicable large employer generally averaged at least 50 full-time employees, including equivalents, in the preceding year; related employers may need aggregation and special rules apply. The offer requirement concerns full-time employees and dependent children, not spouses. For 2026, potential annualized payments are $3,340 under section 4980H(a) and $5,010 under section 4980H(b). Liability requires statutory conditions, including a full-time employee receiving a premium tax credit. The first calculation generally subtracts 30 full-time employees; the second is capped by the first. Payments are assessed monthly. Use the [ACA affordability calculator](https://www.getprescience.com/tools/aca-affordability-calculator) with the correct facts.

## What the employer has to do once the plan exists

**Common employer obligations for a group health plan**

| Obligation | Who it applies to | When |
| --- | --- | --- |
| Summary of Benefits and Coverage (SBC) to employees | All group plans (insured: the carrier prepares it) | At enrollment and renewal |
| ERISA plan document and summary plan description | ERISA-covered private employer plans; government and certain church plans are exceptions | Ongoing; SPD within 90 days of enrollment |
| COBRA continuation coverage | Generally private employer plans meeting the prior-year 20-employee test; exceptions and state continuation rules apply | After a qualifying event causing loss of coverage, subject to plan and employer applicability |
| Form 5500 | Generally plans with 100+ participants | Annually |
| ACA reporting (Forms 1094-C and 1095-C) | Applicable large employers | Annually |
| PCORI fee ($3.84 per covered life for plan years ending Oct. 2025–Sept. 2026) | Self-funded and level-funded plans (the carrier pays for insured plans) | By July 31 on Form 720 |
| Medicare Part D creditable coverage notice | Entities providing prescription coverage to Medicare Part D eligible individuals | Before October 15 each year |

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](https://www.getprescience.com/guides/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](https://www.getprescience.com/guides/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](https://www.getprescience.com/guides/do-i-need-a-health-insurance-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.

**Start the setup with your own company and employee list**

You have the steps. Use the census and contribution policy to compare a written proposal, then confirm enrollment and effective dates before telling employees coverage is active.

[Start my company's quote](https://www.getprescience.com/quote)

[Find my payroll census export guide](https://www.getprescience.com/integrations)

[Download the census CSV template](https://www.getprescience.com/api/employer/census-intake/template)

## 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.

> **Prescience Diamond: A company health plan with an effective $0 deductible.** Setting up your first plan? We handle the setup steps above, from quote and enrollment to compliance and COBRA, and your payroll provider stays the same.
> - **An effective $0 deductible** and simple copays shown before a visit
> - **A broad national PPO network,** plus providers we contract with directly
> - **24/7 physician-led care navigation** that books visits and explains costs
> - **Usually 10–20% below comparable fully insured coverage,** fixed in your quote, with no admin fees
> Best for teams of about 15 or more that want one great group plan. [Get a Diamond quote](https://www.getprescience.com/get-started?p=Employer&product=diamond)

## Frequently asked questions

**How does employer health insurance work?**

The employer offers a group plan and pays most of the premium; employees pay the rest, usually pre-tax, and use the plan's network when they get care.

**Is employer health insurance taxable?**

Eligible employer contributions are generally excluded from employee income, and qualifying employee contributions can be pre-tax through a Section 125 plan. More-than-2% S-corporation owners, partners, sole proprietors and some non-tax-dependent coverage require different treatment.

**How much do employers pay for health insurance on average?**

Subtracting average worker contributions from KFF’s 2025 average premiums gives $7,885 for single coverage and $20,143 for family coverage. KFF separately reports average employee contribution shares of 16% and 26%; ratios of average dollar amounts need not match averages of contribution percentages exactly.

**Do small businesses have to offer health insurance?**

The federal ACA employer shared-responsibility provisions generally apply to employers averaging at least 50 full-time employees including equivalents in the prior year, with aggregation and other special rules. Smaller employers may have other state or local obligations. Once a plan exists, many federal benefit rules apply regardless of employer size.

**What is the difference between fully insured and self-funded?**

In a fully insured plan the carrier takes the claims risk for a fixed premium. In a self-funded plan the employer pays claims itself, usually with stop-loss insurance, and keeps any savings.

**How long can an employer make new hires wait for health insurance?**

A waiting period generally cannot exceed 90 days after an employee is otherwise eligible. Other permitted eligibility requirements and variable-hour measurement rules need separate review. Do not use “first of the month after 90 days,” which can exceed the limit.

**Can a small business get group coverage if not enough employees enroll?**

Yes. Federal rules require insurers to accept small groups that miss participation or contribution rules during an annual window from November 15 to December 15.

**Do part-time employees have to be offered coverage?**

Not under the ACA, which looks at employees averaging 30 or more hours a week. You can choose to cover part-time staff, but apply the rule to a whole class, not individuals.

**What happens to my employer health insurance when I leave my job?**

Check the plan’s termination date. Eligible people with a qualifying coverage loss may continue coverage under COBRA, generally paying up to 102% of the full premium. Federal COBRA generally covers private-sector employer plans meeting the prior-year 20-employee test, with exceptions; state continuation may also apply. Losing qualifying coverage can provide a marketplace special enrollment opportunity.

## Sources

- [KFF, 2025 Employer Health Benefits Survey](https://www.kff.org/health-costs/2025-employer-health-benefits-survey/)
- [U.S. Census Bureau, Health Insurance Coverage in the United States: 2024](https://www.census.gov/library/publications/2025/demo/p60-288.html)
- [45 CFR 147.104, Guaranteed availability of coverage (small group November 15–December 15 window) (2025 official CFR edition)](https://www.govinfo.gov/content/pkg/CFR-2025-title45-vol2/pdf/CFR-2025-title45-vol2-sec147-104.pdf)
- [29 CFR 2590.715-2708, 90-day waiting period limitation](https://www.ecfr.gov/current/title-29/section-2590.715-2708)
- [IRS Revenue Procedure 2025-25 (2026 affordability percentage, 9.96%)](https://www.irs.gov/pub/irs-drop/rp-25-25.pdf)
- [IRS Revenue Procedure 2025-26 (2026 employer shared responsibility payment amounts)](https://www.irs.gov/pub/irs-drop/rp-25-26.pdf)
- [IRS, Employer shared responsibility provisions](https://www.irs.gov/affordable-care-act/employers/employer-shared-responsibility-provisions)
- [U.S. Department of Labor, COBRA continuation coverage](https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/an-employers-guide-to-group-health-continuation-coverage-under-cobra)
- [CMS, 2027 premium adjustment percentage and maximum annual limitation on cost sharing (January 2026)](https://www.cms.gov/files/document/2027-papi-parameters-guidance-2026-01-29.pdf)
- [IRS Notice 2013-54, Application of market reforms to HRAs and employer payment plans](https://www.irs.gov/pub/irs-drop/n-13-54.pdf)
- [IRS, Publication 15-B, accident and health benefits and owner exceptions](https://www.irs.gov/publications/p15b)
- [IRS, PCORI fee questions and answers](https://www.irs.gov/affordable-care-act/patient-centered-outcomes-research-trust-fund-fee-questions-and-answers)
- [HealthCare.gov, Essential health benefits](https://www.healthcare.gov/coverage/what-marketplace-plans-cover/)