Can Employers Reimburse Employees for Health Insurance?

Can employers reimburse employees for health insurance?

Employers can help with employees’ health insurance expenses in several ways. However, if you don’t use a pretax shelter provided by the IRS, such as a health reimbursement arrangement (HRA), there could be significant tax consequences.

What is an HRA?

An HRA is an employer-funded and -owned group health plan that allows employees to be reimbursed, tax-free, for some medical expenses. There is a cap on how much employees can be reimbursed annually. Any money not used during a plan year can be rolled over to the following year.

There are a few types of HRAs, including: 

• Standard HRA: In a standard HRA, the company chooses how much to contribute and must offer the plan to all employees. A standard HRA can reimburse deductibles, copays, prescriptions, and more but can’t cover premiums. 
• Individual coverage HRA (ICHRA): With an ICHRA, employers choose how much to fund and can include or exclude specific employee groups. Employees can use ICHRA funds to pay insurance premiums and other approved expenses, promoting employee and employer flexibility while allowing the employer to enjoy the same tax-favored status as employer contributions toward a traditional group health plan.  
• Excepted benefit HRA (EBHRA): The IRS posts contribution limits for EBHRAs, which can cover only specific benefits, including COBRA and long-term care.
• Qualified Small Employer HRA (QSEHRA): Businesses with fewer than 50 employees without a group plan can set up a QSEHRA. (We’ll explain more about QSEHRAs below.)
• Group coverage HRA (GCHRA): A GCHRA typically appeals to businesses that offer a high deductible health plan (HDHP). 

Employers may choose to offer HRAs over group small business health insurance for the following reasons: 

• HRAs are easy to administer. HRA program oversight is generally easy, whereas group health insurance plans are quite involved for some administrative teams. 
• HRAs can be budget-friendly. HRAs allow companies to better manage their annual budgets while offering several tax advantages.

What is a QSEHRA?

As explained above, a QSEHRA is a specific HRA type designed to help smaller businesses offset some of their employees’ healthcare costs by providing nontaxed reimbursement of some healthcare expenses, including premium and coinsurance payments. 

To be eligible for a QSEHRA: 

• Employers must have 50 or fewer employees.
• Employers must offer healthcare coverage that meets Affordable Care Act (ACA) requirements, including an individual marketplace plan.
• Employers must provide the same reimbursement terms to all full-time employees. (Specific reimbursement amounts can vary by age and how people in a household are covered under the plan.)
• Employers must not offer a group health plan, like the Small Business Health Options Program (SHOP) or a healthcare FSA (flexible spending account).

The maximum QSEHRA benefits or contributions in 2022 were $5,450 ($454.17 monthly) for employee-only coverage and $11,050 ($920.83 monthly) for employee and household coverage. Understanding the caps for each employee in the program you offer is essential, as it relates to an employee’s growing burden in absorbing annually increasing healthcare costs. 

How to reimburse employees for health insurance costs

Your HRA structure determines how you reimburse employees for health costs.

1. Reimburse employees when you have a QSEHRA. 

Within a QSEHRA, the business can select a monthly benefit cap or tax-free money allowance for each employee. Note that all full-time employees must receive the same allowance amount.

Employees obtaining care will directly pay their health care provider or insurance company. Afterward, they’ll submit proof of payment to their employers, and the employer will use QSEHRA funds to reimburse them. Reimbursement is tax-free.

2. Reimburse employees when you have a standard HRA or GCHRA. 

With a group-affiliated HRA, employers select a monthly benefit allowance of tax-free money to offer each enrolled employee. Employees then purchase what they need throughout the month, saving their receipts for the employer to review. Once the review process is complete and the expense is approved, the employer reimburses the employee up to the monthly cap they’ve set.

Employers execute a standard HRA the same way they would a GCHRA. Each employee has a set amount of pretax money each month and submits receipts for qualifying expenses. Also, there are no IRS-regulated contribution caps on standard HRAs, so the employee can be reimbursed for any qualifying expense the IRS lists.

3. Reimburse employees when you have an ICHRA.

With an ICHRA, employers can reimburse employees tax-free for health insurance purchased on the open market. Employers can opt to cover only premiums or also reimburse for other qualifying medical expenses. With an ICHRA, the employer can essentially provide health insurance benefits without maintaining a conventional group health insurance plan.

After the employee incurs reimbursable expenses, they’ll submit specific invoices, receipts or benefits explanations detailing: 

• The name of the premium they paid or the service they received
• The cost of their expense
• The vendor’s name
• The date the expense was incurred

The employer or ICHRA manager will examine the expenses to ensure they’re covered and reimburse the employee via payroll, check or transfer. 

4. Reimburse employees when you have an EBHRA.

An excepted benefit HRA allows employers of any size to use pretax dollars to reimburse specific benefits. Employers can establish a reimbursement limit of up to $1,800 (this will rise to $1,950 in 2023). Carryover amounts are not counted in the annual limits, and employers may not offer an EBHRA and an ICHRA to the same employee.

The employee will pay for qualifying medical expenses out of pocket and then submit a claim for reimbursement with the employer.  

What rules must health insurance reimbursements follow?

While the ACA doesn’t directly govern HRAs, you must follow Employee Retirement Income Security Act of 1974 (ERISA), IRS and other regulations to remain compliant. Ensure the following items are in order in your HRA:

• Plan documents: Plan documents outline the reimbursement program, what it allows and what it doesn’t, and what the IRS requires via ERISA.
• Proof of reimbursement: All HRA programs must offer reimbursement and cannot pay directly for employees’ health insurance costs.
• Health plan rules: The most common HRA program options must comply with ERISA, HIPAA, COBRA coverage and the ACA.

Pros and Cons of HRAs

Employers should consider the pros and cons of establishing an HRA for their employees to ensure they make the best decision for their organization. 

The pros of an HRA include the following:

• HRAs help control costs. Employers choose how much to contribute to the HRA each year.
• HRA contributions are tax-deductible. Employer contributions are 100% tax-deductible.
• HRAs help recruit talent. An HRA is an added benefit for employees that may help recruiting efforts.  

The cons of the HRA include the following:

• HRAs aren’t portable. Employees can’t port funds allocated to them if they leave. You may consider noting this in an employment termination letter.
• HRAs aren’t standardized. While the plans must follow ERISA guidelines, there is a lot of plan flexibility, which may lead to confusion.
• HRAs don’t cover the self-employed. Solo business owners are not eligible for the plan’s benefits. 

Reimbursing health costs can strengthen your organization

When employers add an HRA to their employee benefits package to help with healthcare expenses, they show how valuable their team is to the organization’s bottom line. HRAs are low-risk, budget-friendly options for small businesses that want to do right by their employees and keep excellent team members for the long term.

Kimberlee Leonard contributed to the reporting and writing in this article.