Is health insurance reimbursement taxable? Is a health reimbursement account taxable? Is health insurance reimbursement considered income? What is the insurance reimbursement tax treatment? Is an HRA taxable when an employer is reimbursing employees for health insurance? If you're looking for the answer to any of these questions, you're in luck.
Is health insurance reimbursement considered income?
Before we jump in to insurance reimbursement tax treatment, the answer is no. Health insurance reimbursement through a health reimbursement arrangement, or reimbursing employees for health insurance, is not taxable. HRA contributions aren't considered income, so employees don't pay income tax on it and employers don't pay payroll tax.
Sweet!
Is health insurance reimbursement taxable?
While in the past, the IRS typically treated reimbursements as income and insisted that the employer pay payroll taxes and the employees recognize income tax, now business owners and employers have more options when it comes to offering health insurance to their employees.
There are two types of health reimbursement arrangements that make it possible to reimburse employees for health insurance premiums and qualified medical expenses tax-free.
→ Learn all of the HRA Account Pros and Cons!
Here’s what you need to know.
Insurance reimbursement tax treatment: how it works
HRA reimbursements are not taxable. That's the beauty of them! Here's how they work. The mechanics of a health reimbursement arrangement are surprisingly simple. At a high-level, employees pay for their own health expenses and employers reimburse them.
- 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
Why HRAs are great: Employees pay for health expenses, you reimburse them, tax-free.
Types of tax-free 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.
Under these arrangements, 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.
Here are the two types:
- 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 2023 QSEHRA contribution limits), let your employees choose the plan that works best for them, and reimburse them when they submit receipts! Learn more about our QSEHRA administrator platform.
- The individual coverage HRA (ICHRA, or ICHRA plan) 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. See if ICHRA is right for your business with ICHRA pros and cons, or learn more about our ICHRA administrator platform.
How to reimburse employees tax-free for medical expenses
We make it easy for employees to just snap a picture of their receipts for reimbursement. Employers have a lot of flexibility over what is reimbursed.
Understanding the impact of these options can go a long way towards helping the employer achieve their objectives and keep their budget in check.
Here are your options:
- Reimburse Insurance Premiums Only: Employers can limit reimbursements to only go towards eligible premium expenses. Typically, this refers to individual health insurance premiums but could also include eligible dental premiums, vision premiums, etc. as long as the employee has Minimum Essential Coverage (MEC) for QSEHRA or a qualified health plan for ICHRA.
- Reimburse Insurance Premiums and Medical Expenses: Most employers choose to allow medical expenses to be reimbursed too. Note: Employers can choose to exclude categories of expenses (i.e., “prescriptions”) as long as the exclusion is applied fairly to everyone.
Wondering what counts as qualified medical expenses? Here’s a comprehensive list!
Need more info on health insurance reimbursement?
Take Command’s small business tax strategy HRA guide can help direct you to the best arrangement for your business and our HRA Guide can walk you through the ins and outs of offering an HRA and what to look for in an HRA administrator. We’ve also compiled answers to some of the most common HRA questions from employees.
We are ready to chat on our website if you have any specific questions about your business and how HRAs could help. Setting up a small business HRA is simple and quick, and our team is here to help if you need it.
This post was originally published in 2021 and has been updated with new information and insights for 2023.
