Health insurance reimbursement for employees is a new way of doing employee health benefits that's tax advantaged, efficient, and simple. While for many years group plans have been the primary option for small businesses looking to offer health insurance, that is no longer the case. You’ve got options when it comes to health insurance reimbursement to employees, thanks to recently created health reimbursement arrangements (HRAs). In this post, we explain how health insurance reimbursement for employees works.
Health insurance reimbursement for employees
For a long time, small group health insurance plans were the only way to provide employee health benefits to employees. A small group plan is tax-free for employers and employees, it's a well known model with an ample selection of products available, and it's perceived as an effective recruiting tool.
But the challenges are very real for business owners: there are unpredictable costs year over year, participation rates can be an issue, and there's little plan flexibility in the one size fits all plan that's been selected for the business.
While it is the standard-bearer of employer-sponsored benefits, small-group insurance is an imperfect solution. That's why when the Qualified Small Employer HRA and the Individual Coverage HRA were created, business owners and their employees stand to benefit from the new way to offer health benefits. These new models of HRAs allow for business owners to reimburse employees for premiums and medical expenses tax-free.
→ Read more employee benefits trends!
How to reimburse employees for health insurance
There are several types of HRAs, but there are currently only two types that allow for employers to reimburse employees tax-free for qualified individual insurance premiums:
These new HRAs are sometimes referred to as “401(K)-style” insurance.
→ Check out our post on How to Offer Health Benefits to Employees
In general, HRA is an umbrella term for any legal arrangement between an employer and their employees to reimburse for medical expenses and/or insurance premiums on a tax-free basis. Under this arrangement, 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. HRAs can also reimburse dental premiums.
Pros
- Reimbursements are tax-free
- Employers keep unused funds
- Predictable budget year after year
- Insurance not tied to employer
- More plan choices for employees
- No participation rates
- Fast and easy setup
Cons
- Dependent on a strong individual market
- Limited provider networks
- Conflicts with premium tax credits
- Owner participation limitations
- Confusion over new model
→ See if the HRA insurance model is for you!
How health insurance reimbursement to employees works
As the name implies, HRAs like ICHRA and QSEHRA are based on reimbursing employees for insurance rather than buying it for them. At a high-level, the way HRAs work is very simple:
- Design: Employers design their plan, including establishing reimbursement limits and defining which employees are eligible. For ICHRA specifically, employees can be divided by classes (full time, seasonal, part time, salaried vs. non-salaried, etc. and each class can be extended a different level of benefit—varying reimbursement amounts or even in combination with a group plan. For QSEHRA, you can only vary based on age or family size.
- Choose: Employees purchase the individual plans they want.
- Submit Proof of Coverage: Employees submit claims for reimbursement (can be as easy as snapping a picture of a receipt).
- Reimburse: Employers reimburse employees for valid claims.
→ Learn more about HRA individual health insurance options.
How can Take Command help you?
If you are searching for a hassle-free way to offer affordable benefits, a small business HRA is certainly worth considering. Take Command is an HRA administrator that will do all the heavy lifting for you!
Use our QSEHRA tax savings calculator to see how much you could save, or take a spin with our QSEHRA plan designer tool to see what your monthly costs would look like.
If you're ready to get started, setting up a small business HRA is a breeze! Our team is here to help clear up any confusion surrounding small business health insurance options. Don't hesitate to give us a shout via our chat feature on the website. We would be happy to help.
This post was originally published in 2020 and has been updated in 2023 to reflect all the new exciting things going on in the HRA world.
