Understanding Association Health Plans and PEO Health Plans: Key Differences and How They Work

Finding affordable health insurance can be daunting for businesses, especially small businesses and self-employed individuals.

Among the options available, Association Health Plans (AHPs) and Professional Employer Organization (PEO) health plans stand out as viable solutions, each with distinct characteristics and benefits.

This blog post aims to demystify these two types of plans, explaining what they are, how they differ, and how they operate.

What is an Association Health Plan (AHP)?

An Association Health Plan (AHP) group health plan allows small businesses and individuals to band together to purchase health insurance. Typically, AHPs are organized by trade associations, professional groups, or chambers of commerce. The primary goal of AHPs is to give smaller entities the buying power of larger corporations, which can lead to lower insurance premiums and more extensive coverage options.

How Do Association Health Plans Work?

AHPs operate by pooling small businesses and sometimes individuals (such as freelancers and consultants) from the same industry or geographic area. AHPs can negotiate better terms with insurers by creating a larger risk pool, much like large employers. This collective approach reduces administrative costs and enhances the negotiating power with health insurance providers.

AHPs are regulated by state and federal laws, which can vary significantly. Historically, they have been subject to the rules set forth by the Employee Retirement Income Security Act (ERISA), ensuring certain protections, such as nondiscrimination policies. AHP plans have a monthly membership fee to join the Association.

What is a PEO Health Plan?

A Professional Employer Organization (PEO) health plan is offered through a co-employment arrangement between a PEO and small businesses. In this arrangement, the PEO becomes the administrative employer of record and handles HR tasks, payroll, and employee benefits. At the same time, the client company retains control over business operations and management of employees. PEOs can work for self-employed individuals, but they cost more.

How Do PEO Health Plans Work?

When a business partners with a PEO, it enters into a co-employment agreement where the PEO consolidates the employees of several small businesses into one large group. Like AHPs, this larger group can leverage its size to secure more favorable health insurance rates and terms than individual businesses could obtain on their own.

PEO health plans are comprehensive, often including medical insurance and dental, vision, and other types of employee benefits. The PEO handles all aspects of plan administration, from enrollment to compliance with healthcare laws, including the Affordable Care Act (ACA), HIPAA, and more.

Differences Between AHPs and PEO Health Plans

1. Employment Relationship:

• AHPs: There is no employment relationship between the association and the members. The association merely acts as an organizer for the health plan.

• PEO Health Plans: Businesses enter into a co-employment relationship with the PEO, where the PEO legally becomes the employer for benefits administration purposes. You must run payroll through the PEO.

2. Regulatory Oversight:

• AHPs: Primarily regulated under ERISA, but also subject to state laws, which can vary.

• PEO Health Plans: Subject to both state and federal regulations. PEOs also often have certifications and accreditations that ensure compliance with various employment laws.

3. Scope of Services:

• AHPs: Mainly focused on providing health insurance and related benefits.

• PEO Health Plans: Part of a broader range of services, including payroll, HR management, compliance, and more, alongside health insurance.

4. Access and Eligibility:

• AHPs: These can be accessed by members of a particular association, which can be industry-specific or based on geographic location.

• PEO Health Plans: Available to any small business that enters into a co-employment agreement with a PEO, regardless of industry.

Which Option is Best for Your Business?

Choosing between an AHP and a PEO health plan depends mainly on your business needs. If you need affordable health insurance and no payroll or HR-related services, an AHP might be the right choice. On the other hand, if you are looking for a comprehensive solution that includes HR services and health benefits, partnering with a PEO might be more advantageous.

AHPs and PEO health plans offer unique benefits that can help small businesses manage costs while providing quality healthcare options to their employees. By understanding the differences and workings of each, business owners can make more informed decisions that align with their specific needs and objectives.

If you want to know which is best for you, take our quiz.