How does health care reimbursement work? The great news is, employers now have more options than ever when it comes to offering health care to their employees. Health benefits are an effective retention strategy, so you already know they matter to your current and future employees. Health care reimbursement is available through health reimbursement arrangements, or HRAs, and they are a great way to save you money and keep your employees happy by allowing them to choose their own providers and doctors.
How do Health Reimbursement Arrangements work?
HRAs are built on a series of regulations to make sure they are being offered fairly and are achieving their intended aim, which is to help employees pay for benefits tax-free. The regulations also do their best to prevent the reimbursements from being used for unfair things, like executive compensation, fraud, discrimination, money laundering, etc.
Here’s a handy 4-step guide to how HRAs work!
How does health care reimbursement work?
The employer chooses an HRA for her company, sets a budget that works for them, and then lets the employers know they can use it. From there, once an employee pays for a medical expense or premium, they just turn in the receipt and submit for reimbursement.
“Employers increasingly hate dealing with health insurance. We are putting more and more responsibility on the employer. They are saying, `I just want to give my employees $400 or $1,000 and make sure they are taken care of, but I don’t want to deal with this anymore.’ HRAs really represent a way for employers to take a step back.” Jack Hooper, Take Command's CEO, for BenefitsPro
We hear from many small business owners who try to help their employees by giving them a bonus or adding to their salaries to help with health insurance. However, that has the unfortunate consequence of triggering payroll and income taxes that end up wasting 20-40% of the bonus before an employee ever gets to use it.
For companies that help employees with health insurance by offering a health stipend or by adding to employee salaries, tax-free reimbursement will typically have a huge tax advantage for both employer and employee.
For example, if a 10-person company offers employees $300/mo ($3,000/mo in total reimbursement) by increasing salaries versus tax-free through a QSEHRA, $1,200 a month ends up going to taxes each month.
Types of health care reimbursement
There are two kinds of health reimbursement arrangements that you need to know about.
- 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 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. ICHRA also 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.
- Unlike a stipend, with a health insurance reimbursement, employers don’t have to pay payroll taxes and employees don’t have to recognize income tax. In addition, reimbursements made by the company count as a tax deduction.
Still have questions about how health care reimbursement works?
Our team of experts are on hand to help. Need help sorting through the details of your HRA options and finding the right one for you? Just chat with us on our website, or check out one of our helpful guides on the ICHRA and QSEHRA.
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.