Group Health Insurance and Health Insurance Taxation
Group underwriting
The employer holds the master policy and each participant receives a certificate of insurance. Group underwriting looks at the group rather than the individual: size, industry, prior claims, and participation. Individual evidence of insurability is generally not required. Rules to know:
- Actively at work - an employee must be on the job to be eligible; a sick employee may have to wait.
- Eligibility waiting period - new hires wait (often 30–90 days) before joining.
- Participation - contributory plans typically require 75% participation; noncontributory plans require 100%.
- Conversion and portability - departing employees may convert group term life to individual coverage within about 31 days without evidence of insurability.
COBRA continuation after a qualifying event runs 18 months for termination or reduced hours, 29 months for disability, and 36 months for events such as divorce, death of the employee, or Medicare eligibility. HIPAA sets portability and privacy rules; ERISA governs reporting and fiduciary duties. Section 125 cafeteria plans let employees pay premiums with pre-tax dollars; flexible spending accounts and HSAs further reduce taxable income.
Taxation rules
Employer-paid health and group term life premiums are deductible to the employer and excluded from employee income. Group term life over $50,000 creates imputed income using IRS Table I rates. Employer-paid disability premiums make benefits taxable; employee-paid premiums make benefits tax free. Key person premiums are not deductible, but benefits are tax free. HSAs are triple tax advantaged: deductible contributions, tax-deferred growth, and tax-free qualified withdrawals.
Rule of thumb
Ask who paid the premium. Employer dollars generally mean a deduction for the business and taxable benefits to the employee; employee after-tax dollars mean tax-free benefits.