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how health insurance reimbursement works

How does health insurance reimbursement work?

Did you know as an employer that health insurance reimbursement is available to you? This allows you to reimburse your employees tax-free for health benefits. These magical tools are called health reimbursement arrangements (or HRAs) and they have been gaining popularity for their flexibility, predictability, cost-control, and customization. 

What is health insurance reimbursement?

Sometimes referred to as “401(K)-style” insurance, two recently created HRAs allow an employer to reimburse for medical expenses and/or insurance premiums on a tax-free basis.

How does health insurance reimbursement work?

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.

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What are the types of health insurance 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 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.

Ask our experts which HRA is best for your business

Can I reimburse with a health insurance stipend?

We meet 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, unfortunately, that triggers 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.

Can I just administer health insurance reimbursement myself?

The answer: it’s not a good idea, and here are a few very valid reasons why.

  • PRIVACY: Given the nature of an HRA and the private health information involved filing reimbursements for qualified medical expenses, privacy is a big issue, even before we get into the whole HIPAA aspect of it (more on that below). As an employer, you would have access to personal information about your employees' health. This could be potentially uncomfortable for everyone involved.
  • PAPERWORK: It's a hassle for employers to keep up with medical receipts and time-consuming to maintain them in a secure way.
  • HIPAA COMPLIANCE: Because small business HRAs are designed for companies with less than 50 employees, it doesn’t technically fall within many of the federal laws that affect health plans built for larger corporations. But that doesn't mean you are off the hook when it comes to HIPAA (the Health Insurance Portability and Accountability Act of 1996). Some parts of HIPAA still apply to small business HRAs. Why? Because all health plans must observe the HIPAA Privacy Rule, regardless of the company's size. This rule protects patients' personal health information (PHI), meaning the hard documentation, emails, and telephone calls regarding an individual's health information. Examples include things like a bill from a doctor's visit, an MRA scan, lab work results, etc.

Look for an HRA administrator

Here’s what to look for in a health insurance reimbursement administrator.

  • Handle compliance, notifications, and reporting.
  • Support your employees
  • Support business owners

Ask our experts how to get started today (it's easy!)

Our QSEHRA platform offers you all that, and more! Set up is quick and easy and we’re happy to walk you through each step! Is the ICHRA a better fit for your business? We’ve got you covered there, too! Let us know if you have any questions or are ready to get started with a health reimbursement arrangement.