Business owners and employers have more options than ever when it comes to offering health insurance to their employees. If you’ve heard of health insurance reimbursement through health reimbursement arrangements, you may be wondering, “Are insurance reimbursements taxable?”
Are insurance reimbursements taxable?
In the past, the IRS typically treated reimbursements as income and insisted that the employer pay payroll taxes and the employees recognize income tax.
Now, however, there are two health reimbursement arrangements that make it possible to reimburse employees for health insurance premiums and qualified medical expenses tax-free.
Let’s look at those.
Using HRAs for insurance reimbursement
Sometimes referred to as “401(K)-style” insurance, two recently created HRAs allow an employer to reimburse for medical expenses and/or insurance premiums on a tax-free basis. Under these arrangements, employees purchase their own health insurance on the open market and then submit claims to their employer to get reimbursed for the cost of their premium and if allowed, all qualified medical expenses.
- The qualified small employer HRA (QSEHRA) requires your business to be small, with less than 50 Full Time Equivalent employees, and you can't offer a group plan at the same time. If you meet those qualifications, you can use an HRA administration tool (like ours!) to create your QSEHRA, decide how much you’ll reimburse each month (up to the contribution limits), let your employees choose the plan that works best for them, and reimburse them when they submit receipts!
- The individual coverage HRA (ICHRA) is almost like a “super-charged” version of the QSEHRA. Instead of being capped at 50 employees, employers of any size can set up an ICHRA for their teams. There are also no contribution limits with this HRA. Another key differentiator from HRAs in the past? ICHRA allows business owners to customize their reimbursements across different classes of employees. While everyone must be treated fairly within a certain class, reimbursement rates can vary between full time, part time, seasonal, remote, etc.
How insurance reimbursement works
The mechanics of an HRA are surprisingly simple. At a high-level, employees pay for their own health expenses and employers reimburse them. Here’s more information on how to reimburse for health insurance.
- Employers design their plan and set reimbursement allowances
- Employees pay for their own health insurance and medical bills
- Employees provide proof of their expenses
- Employers reimburse the employee up to the set limit
→ Read more about how health care reimbursement works here!
→ Learn more about how an HRA is funded.
What can you reimburse?
- Reimburse Insurance Premiums Only: Employers can limit reimbursements to only go towards eligible premium expenses. Typically, this refers to individual health insurance premiums but could also include eligible dental premiums, vision premiums, etc. as long as the employee has Minimum Essential Coverage (MEC) for QSEHRA or a qualified health plan for ICHRA.
- Reimburse Insurance Premiums and Medical Expenses: Most employers choose to allow medical expenses to be reimbursed too. Note: Employers can choose to exclude categories of expenses (i.e., “prescriptions”) as long as the exclusion is applied fairly to everyone. Here’s a comprehensive list of medical expenses that qualify!
Take Command can help with insurance reimbursements
Take Command’s small business tax strategy HRA guide can help direct you to the best arrangement for your business. We’ve also compiled answers to some of the most common HRA questions from employees. We are ready to chat on our website if you have any specific questions about your business and how HRAs could help.
In the meantime, give our new HRA Guide a read! It's chocked full of the good stuff.
A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.