Let’s get into the nitty-gritty and answer the oft asked question: “How does health insurance reimbursement work?” Employers now have more options than ever when it comes to offering health insurance to their employees. Health benefits are a proven, effective retention strategy, so you already know it’s important to your current and future employees. Health reimbursement arrangements, or HRAs, 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 HRAs 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.
Tax Code Section 105 is the regulations that cover this type of tax-friendly tool. That's why you'll hear industry folks toss around the term "Section 105 HRAs."
How does health insurance 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.
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.
What are the types of health insurance reimbursements?
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 QSEHRA 2023 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.
- Unlike a healthcare 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.
Take Command is ready to do the heavy-lifting for you!
Our QSEHRA administration tool walks you through all the steps and makes sure all the important bases are covered. Pro-tip: we are the only QSEHRA administrator that also offers individual health plans. Need help sorting through the details of your HRA options and finding the right one for you? Our team of experts are on hand to help. Just chat with us on our website, or check out one of our helpful guides on our favorite HRAs, like our HRA Guide, ICHRA Guide and QSEHRA Guide.
This post was originally published in 2020 and has been update for 2023 to reflect all of the exciting changes going on in the HRA world.
