Can I Reimburse My Employees for Their Health Insurance?

Providing health insurance is an expected benefit at many companies today. However, the costs of traditional group health plans can be prohibitive for some employers. This leads to the question – can I reimburse employees for their own individual health insurance plans?

The answer is yes, you can reimburse employees for health insurance premiums they pay independently. However, there are some specific ways this needs to be structured which we will cover in this article:

Types of Health Insurance Reimbursement Arrangements (HRAs)
Key Features and Regulations
Setting up a Compliant Reimbursement Plan
Impact on Affordability and Tax Credits
Communicating with Employees
Steps for Offering Reimbursements
Pros and Cons of Reimbursements

Let’s first understand the main types of HRAs that allow insurance reimbursements.

Types of Health Insurance Reimbursement Arrangements (HRAs)

The following Health Reimbursement Arrangements allow employers to reimburse employees for health insurance premiums:

QSEHRA – Qualified Small Employer Health Reimbursement Arrangement is for small businesses with under 50 full-time employees. Reimbursements are tax-free up to $6,150 (single) or $12,450 (family) in 2024.
ICHRA – Individual Coverage HRA is available to employers of any size to reimburse employees for individual health plans without limits.
EBHRA – Excepted Benefit HRA allows reimbursements along with a company group health plan. Limited to $2,100 reimbursement in 2024.

Each of these have specific regulations regarding employer size, reimbursement amounts and coordination with group plans. Let’s look at some key considerations.

Key Features and Regulations

When setting up insurance reimbursements for employees, be aware of the following rules and limitations:

Employers must offer the same terms and reimbursement amounts to all employees within a defined class.
Amounts reimbursed are tax-free for employees and tax-deductible for employers.
Employers must report reimbursements on employees’ W-2 forms.
Reimbursements cannot exceed defined limits depending on the type of HRA.
ICHRAs and EBHRA require employees to have individual health coverage.
Ale employers with 50+ full-time employees have “affordability” requirements under the ACA.
ICHRAs cannot be combined with group health plan offerings from the employer.

Ensuring your reimbursement structure complies with all regulations is crucial.

Setting Up a Compliant Reimbursement Plan

As an employer, follow these steps to set up a compliant HRA for insurance reimbursements:

Consult experts to pick the right HRA for your size and needs.
Set up the HRA as a separate plan with clear terms and conditions.
Determine the reimbursement amounts and classes of employees eligible.
Ensure the reimbursement process and records are well-documented.
Inform employees about how to submit premium invoices for reimbursement.
Put in place procedures to verify employees have active health coverage.
Report reimbursement payments on employees’ W-2 forms.

Impact on Affordability and Tax Credits

Reimbursements may impact employees’ eligibility for premium tax credits on health insurance plans from the public Marketplace.

If reimbursements make coverage unaffordable, employees can decline and seek coverage with subsidies. So it’s important to carefully assess affordability when structuring your program.

Communicating with Employees

Clearly communicate the following details of the reimbursement plan to employees:

How much you will reimburse for insurance costs
What coverage types are eligible
How to submit premium invoices for reimbursement
Impact on Marketplace plan subsidies
Changes to new plan year policies

Steps for Offering Reimbursements

Follow this process when ready to offer health insurance reimbursements:

Research HRA options and pick the best fit.
Set up the HRA, documenting all details.
Notify employees before the start of the plan year.
Collect invoices and validate eligible expenses.
Reimburse employees and report payments on W-2s.
Assist employees through any impact on Marketplace subsidies.

Pros and Cons of Reimbursements

Some key advantages and disadvantages of reimbursing employees for health insurance:

Pros

Lower and predictable costs for employers
Employees get individual choice and flexibility
Can be offered alongside a group health plan
Available to employers of any size

Cons

Complex administrative requirements
Must validate employee coverage
Can impact affordability of public exchange plans
Employees lose group negotiating leverage

Overall, in the right circumstances, reimbursements can be a useful way for employers to subsidize health insurance costs. But be sure to carefully evaluate the tradeoffs for your particular situation.

In Conclusion

Employers can reimburse employees for individual health plan premiums using Health Reimbursement Arrangements (HRAs).
Different types of HRAs have specific rules around eligibility, limits, coordination with group plans etc.
Reimbursements must comply with ACA regulations to ensure proper tax treatment.
HRAs can provide an alternative to expensive group health plans but have some downsides to consider as well.
With the right planning, communication and administration, insurance reimbursements allow employers to help employees with healthcare costs.

How to Compliantly Reimburse Employees for their Healthcare

FAQ

Is employer reimbursement for health insurance taxable?

If an employer pays the cost of an accident or health insurance plan for his/her employees (including an employee’s spouse and dependents), then the employer’s payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding.

Can a company reimburse an employee for life insurance?

Reimbursements have to be made under an accountable expense plan. This means that the employee needs to provide to you sufficient evidence to justify the reimbursement. For example, a copy of the insurance bill would be sufficient evidence. Such payments for insurance premiums would be deductible by the employer.

How does insurance reimbursement work?

The medical provider submits a claim to the insurance company for services rendered, and the insurance company reviews and processes the claim. Once the claim is approved, the insurance company pays the provider based on the reimbursement method in place.

How does health reimbursement arrangement work?

Health Reimbursement Arrangements (HRAs) are employer-funded group health plans from which employees are reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year.