How can employers reimburse employees for health insurance?

If you've been shopping around for a better way to offer health benefits, you've probably run into the same wall: group plans are expensive, rigid, and increasingly hard to justify for small and mid-size businesses. The good news is that health insurance reimbursement has come a long way and employers of all sizes have real, tax-advantaged options that didn't exist a decade ago.

Employers can reimburse employees for health insurance. When structured through a properly designed health reimbursement arrangement, those dollars become a tax-free benefit for employees and a fully deductible business expense for the company.

Here's what you need to know.

Why simple reimbursement doesn't work

It seems straightforward enough: pay your employee's health insurance premium, get them covered, move on. But informal reimbursement arrangements have never sat well with the IRS, and the Affordable Care Act made things worse before they got better.

When the ACA passed in 2010, it had an unintended consequence for small businesses. The law interpreted any employer reimbursing for individual health insurance as technically operating a group plan, and group plans are required to cover preventive care at no cost. Since informal reimbursement arrangements didn't meet that standard, businesses doing it were suddenly exposed to penalties of up to $100 per employee per day.¹ The IRS began enforcing this in late 2015.

The fix came in stages. The bipartisan 21st Century Cures Act, signed in late 2016, created a formal pathway for small employers to reimburse for health insurance without penalty. Regulatory updates in 2019 extended that framework to employers of all sizes. Today, health reimbursement arrangements are a mature, well-established benefits tool, and adoption is accelerating.

What is a health reimbursement arrangement?

A health reimbursement arrangement is an employer-funded plan that reimburses employees tax-free for health insurance premiums and qualified medical expenses. The employer sets the allowance, the employee chooses their own coverage, and reimbursements flow back to the employee after they submit proof of their expenses.

The process works like this:

1. The employer designs the plan and sets reimbursement allowances

2. Employees pay for their own health insurance and medical expenses

3. Employees submit proof of those expenses

4. The employer reimburses up to the set limit

Because employees pick their own plans, an HRA is far more flexible than a traditional group plan, which requires everyone to use the same coverage regardless of their health needs, preferred doctors, or geographic location. The employer controls the budget; the employee controls the choices.

The two HRAs worth knowing

There are two HRA types that cover the vast majority of employers in 2026.

ICHRA

An Individual Coverage HRA is available to employers of any size, with no cap on how much you can contribute. You can launch one at any point during the year, and you can divide your workforce into employee classes, full-time vs. part-time, salaried vs. hourly, office-based vs. remote, and offer different reimbursement levels to each. That flexibility makes ICHRA a strong fit for businesses with diverse or distributed teams.

QSEHRA

A Qualified Small Employer HRA is designed for businesses with fewer than 50 employees. Employers set a fixed monthly allowance that employees can apply toward individual health insurance or qualified medical expenses, tax-free. All employees must receive the same reimbursement level, though amounts can vary by age and family size. QSEHRA contribution limits apply, so check the current limits when designing your plan.

IRS rules for health insurance reimbursement

Employers should be familiar with IRS Publication 502, which covers qualifying medical and dental expenses, required documentation, and applicable deduction limits. Beyond that, a few rules apply to all HRAs:

• HRAs must be funded solely by the employer

• Funds can only reimburse eligible expenses for the employee, their spouse, and dependents

• Employers can set limits on reimbursable amounts and eligible expense types

• HRAs must comply with HIPAA and non-discrimination requirements

• Reimbursements must be reported on the employee's W-2

HRA reimbursements are generally tax-free for employees and deductible for employers, making them one of the most tax-efficient ways to fund employee health benefits. As with anything tax-related, it's worth having a tax professional review your specific situation.

Can an employer pay 100% of health insurance?

Yes. There's no rule preventing an employer from covering the full cost of an employee's health insurance, whether through a traditional group plan or an HRA. When done through a compliant arrangement, those contributions are generally not considered taxable income to the employee. Employers can also reimburse employees who obtain coverage through a spouse's group plan, though the tax treatment depends on whether that reimbursement flows through a qualified structure like an HRA or a Section 125 plan.

Affordability in 2026: what's changed

One notable update for 2026 is the ACA affordability threshold, which has increased to 9.96% of an employee's household income, up from 9.02% in 2025. This is the highest the threshold has been in several years, and it gives employers a bit more breathing room when calculating contributions.

For ICHRA purposes, an offer is considered affordable when the monthly premium an employee would pay, after the employer's reimbursement, for the lowest-cost Silver plan in their area is less than 9.96% of 1/12 of their annual household income.

Why this matters: if the ICHRA offer is affordable, the employee cannot opt out to claim premium tax credits on the Marketplace. If it's not considered affordable, the employee must decline the ICHRA in order to access those credits. The two cannot be combined.

For eligibility, any W-2 employee is generally covered. Employees must be enrolled in an ACA-compliant qualified health plan. Metal tier names (Bronze, Silver, Gold, Platinum) are a reliable indicator that a plan qualifies. Short-term plans, health sharing ministry plans, and association health plans are not eligible for ICHRA.

ICHRA rules at a glance

• Open to employers of any size

• No maximum or minimum monthly reimbursement limits

• Can be launched at any time, not just during open enrollment

• Employees receive a 60-day special enrollment period when an

• ICHRA is introduced

• Can run alongside a traditional group plan, as long as both options aren't offered to the same employee class

• Covers premiums and qualified medical expenses, including dental and vision

• Requires 90 days' advance notice to employees before each plan year

Small business health care tax credit 

If you're a small employer offering a SHOP plan, you may also qualify for the Small Business Health Care Tax Credit, worth up to 50% of the premiums you pay (35% for nonprofits). To be eligible:

• Fewer than 25 full-time equivalent employees

• Average employee salary of approximately $56,000 per year or below

• You contribute at least 50% of premium costs for full-time employees

• You offer SHOP coverage to all full-time employees

What to expect from HRAs

Benefits:

• Flexibility for all business sizes: ICHRAs work for any employer; QSEHRAs are designed for smaller teams with under 50 employees.

• Employee choice: Employees pick their own providers and plans rather than defaulting to whatever the employer selected.

• Customizable allowances: ICHRAs allow different reimbursement levels by employee class. QSEHRAs are uniform but can be adjusted for age and family size.

• Broad expense eligibility: Depending on the HRA design, funds can cover premiums, out-of-pocket medical costs, dental, vision, or all of the above.

• Special enrollment period: Introducing an ICHRA or QSEHRA triggers a special enrollment period, giving employees the ability to shop for individual coverage outside of the standard open enrollment window.

• Rollover potential: Employers can allow unused HRA funds to roll over month to month or year to year. If not, unused funds remain with the employer.

Important considerations when evaluating an HRA

Employee ownership of coverage

With an HRA, employees own their individual health plans, which means they can often keep their coverage even if they change jobs. Employer reimbursement funds themselves do not transfer after employment ends.

Benefits strategy by employee class

HRAs are designed to give employers flexibility in how they structure benefits across employee classes. Organizations should thoughtfully determine which employee groups are best suited for an HRA versus traditional group coverage.

Budget planning & contribution strategy

QSEHRAs include annual contribution limits, while ICHRAs offer significantly more flexibility for employers looking to scale contributions across teams and markets. Larger employers should also evaluate affordability requirements as part of plan design.

Regional plan availability

Health plan options can vary by geography. In many markets, employees benefit from broad carrier and plan choice, while some rural regions may have fewer individual coverage options available. A strong enrollment and support experience can help employees navigate those decisions confidently.

Ready to find the right reimbursement solution for your team?

Not sure whether an ICHRA or QSEHRA is the better fit, or how to structure contributions for your workforce? Talk to a Take Command expert. Our team can walk you through your options, run the numbers, and help you launch a plan that works for your business and your employees.

FAQs

How does a taxable stipend differ from an HRA?

A taxable health insurance stipend is a fixed dollar amount added to an employee's paycheck to help cover health costs. It's simpler to administer, but because it counts as taxable income, both the employer and employee pay more in taxes compared to a properly structured HRA. Employees need to report it when filing their taxes.

How does a tax-free HRA work?

Employees pay their health insurance premiums and qualified medical expenses out of pocket, then submit documentation to the employer. The employer reimburses those costs up to the plan's set allowance. As long as the arrangement complies with IRS guidelines, the reimbursements are tax-free for the employee and deductible for the employer.

Can I pay for employees' health insurance directly?

Yes. Paying directly through a compliant group health plan means those contributions are generally tax-deductible for the business and tax-free for employees. Direct payment comes with more administrative responsibility, including managing enrollment, renewals, and ACA compliance, but it remains a valid and widely used approach.

For additional resources, check out our HRA Guide, ICHRA Guide, QSEHRA Guide, and ICHRA FAQ page.

This post was originally published in 2019 and has been updated with new information and insights for 2026. 

References

1. IRS Notice 2013-54. Application of Market Reform and Other Provisions of the Affordable Care Act to HRAs, Health FSAs, and Certain Other Employer Healthcare Arrangements. Internal Revenue Service. https://www.irs.gov/pub/irs-drop/n-13-54.pdf