Can employers reimburse employees for health insurance in 2023? Can a business reimburse an employee for health insurance? Can an employer reimburse employee health premiums? We hear these questions a lot. The quick answer is “no”, at least not tax-free without some serious tax consequences. The IRS is going to treat the employer reimbursement of health insurance as income and insist that the employer pay payroll taxes and the employees recognize income tax. There are, however, health reimbursement arrangements that allow employers to reimburse for employee health insurance on a tax-advantaged basis.
Can employers reimburse employees for health insurance?
Now in 2023, employers of all sizes now have more flexibility than ever before when it comes to reimbursing their employees for health insurance. This is a huge win for business owners who are looking for a more affordable, efficient way to offer small business health insurance to their teams without having to hassle with a pricey, one-size-fits-all group plan. But first, the back story.
What happens when you reimburse employees for health insurance?
The reality is tax free reimbursement used to be a common practice for small business owners. However, when the Affordable Care Act (ACA, a.k.a. “Obamacare) passed in 2010, the law had the unintended consequence of disallowing tax-free reimbursement for small companies.
The primary hang-up was an interpretation that any company that reimbursed for health insurance (including individual) was technically a group plan. According to the ACA, group plans are required to provide preventive care at no cost.
Since employers that reimbursed for individual plans did not meet the preventive care requirements, they would be subject to group plan penalties of up to $100 per employee per day. Yikes!
While Congress addressed the hotly debated topic of "Obamacare," little was done to help fix the problem. In late 2015 the IRS started enforcing the provision and leveraging hefty fines and penalties for companies caught reimbursing for individual health insurance.
In late 2016, the bipartisan 21st Century Cures Act was signed into law by President Obama that opened up the doors for health reimbursement arrangements for small employers. Three years later, regulatory rule updates allowed for this same treatment to be used by employers of all sizes and with a greater degree of flexibility.
Fast forward to 2023, two different types of HRAs have emerged and gained momentum to help businesses of all sizes.
ICHRAs have grown 3.5x in the past year and QSEHRAs have doubled in size on the market during that same time period, according to the HRA Council.
Reimbursing employees for health insurance is easier than ever!
The better option for employer reimbursement for health insurance: HRAs
Being on a group plan is like requiring everyone to wear the same size suit. Since everyone has their own needs and preferences when it comes to their health, doctors, and prescriptions, an HRA allows each employee to choose what’s best for them.
A health reimbursement arrangement allows business owners to reimburse their employees on a tax-free basis for medical expenses, like health insurance premiums or qualified medical expenses.
Most importantly, HRAs allow business owners to avoid the penalties and fees and taxes we discussed earlier in the post.
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 how it works:
- 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
There are currently three "flavors" on the market.
QSEHRA: a Qualified Small Employer HRA allows small employers to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. This means employers get to offer benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and employees can choose the plan they want. The key thing to remember here is that all employees must be reimbursed at the same level.
ICHRA: an Individual Coverage HRA allows employers of any size to reimburse any amount per month for healthcare expenses incurred by employees on a tax-free basis, starting at any time of the year. The distinguishing element of this HRA is that employees can be divided into an unlimited number of classes, like hourly vs. salary or even based on location, and be reimbursed at different levels.
EBHRA: an Excepted Benefit HRA is another type of HRA that allows employers of any size to use pretax dollars to reimburse certain limited benefits like vision insurance, dental insurance, long-term care insurance, or nursing home care. Employees do not have to participate in a group plan to receive its benefits and reimbursements are limited to $1,800 a year.
→ Read more about Employer HRA Contributions.
→ Read more on how HRAs can reimburse insurance premiums.
Which HRA is best for employer reimbursement for health insurance in 2023?
What makes sense for your company depends on a number of factors, like company size, budget, legal makeup, local insurance market factors, etc. Some cities have market conditions with competitive individual insurance markets that make them prime for this new reimbursement model.
For additional resources, check out our HRA Guide, QSEHRA Guide, our ICHRA Guide, or our wildly popular ICHRA FAQ Page.
Our team of HRA experts is online and ready to walk you through your options. Give us a shout!
This post was originally published in 2019 and has been updated with new information and insights for 2023.
I wrote this blog because I care about ideas (big and little) that can help fix our healthcare system. I used to work on projects for Kaiser Permanente and the Parkland Health & Hospital System so I've seen the system inside and out. It's so important that consumers keep up with industry shifts and changing health insurance regulations. I'm also Take Command Health's Content Editor and a busy mom. Learn more about me and connect with me on our about us page. Thanks!