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? You're in luck if you're looking for the answer to any of these questions.
How Health Reimbursement Works
Health Reimbursement Arrangements (HRAs), including Individual Coverage HRAs (ICHRAs) and Qualified Small Employer HRAs (QSEHRAs), are employer-funded health benefits designed to reimburse employees for medical expenses and, in some cases, health insurance premiums. The process typically involves the following steps:
- Employer Setup: Employers set up an HRA plan, deciding on the reimbursement limits according to their budget and their employees' needs. This setup process often involves choosing between different HRA types to find the one that best suits the company's and employees' needs.
- Employee Purchase: Employees pay for their health insurance premiums or incur medical expenses out of pocket. These expenses must qualify under the terms defined by the HRA.
- Documentation Submission: Employees submit proof of their expenses to the employer or a third-party administrator. This proof often includes receipts or invoices showing the expense and its eligibility under the HRA.
- Reimbursement: After reviewing the submitted proof, employers reimburse employees for their eligible expenses up to the limit set in the HRA. These reimbursements are tax-free, provided they are for qualified medical expenses.
This reimbursement mechanism offers flexibility and autonomy, allowing employees to choose the healthcare services and coverage that best meet their needs while providing employers with a cost-effective way to offer health benefits.
Advantages of Health Insurance Reimbursement
Health insurance reimbursement through HRAs offers several advantages over traditional group health insurance plans:
For Employers
- Cost Control: Employers can set caps on the amount they reimburse, helping to control the cost of providing health benefits.
- Flexibility: HRAs offer various options tailored to the needs of both the employer and the employees, such as allowing employers to offer different reimbursement amounts to different classes of employees.
- Tax Benefits: Contributions made to an HRA are tax-deductible for the employer, and reimbursements are tax-free for the employee, provided they are used for qualified medical expenses.
- Simplicity: Employers can avoid traditional group health plans' complexities and administrative burdens.
For Employees
- Choice: Employees are free to choose their insurance provider and plan, allowing for greater personalization of their health coverage.
- Tax-Free Reimbursements: Employees receive tax-free reimbursements for qualified medical expenses, reducing healthcare costs.
- Portability: In some cases, employees can keep their health insurance when they change jobs, offering greater continuity of care.
- Efficiency: Reimbursements for direct healthcare costs can lead to more efficient use of funds, as employees spend on what they need.
By providing a more flexible, personalized approach to health benefits, health insurance reimbursement can be an advantageous option for employers and employees, aligning with the evolving needs and preferences of the modern workforce.
Is health insurance reimbursement considered income?
Before we discuss 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 them, 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 for offering health insurance to their employees.
Two types of health reimbursement arrangements allow employers to tax-free reimburse employees for health insurance premiums and qualified medical expenses.
→ Learn all of the HRA Account Pros and Cons!
Here’s what you need to know.
How does an HRA work?
HRA reimbursements are not taxable—that's their beauty! 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 plans 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 HRAs
Sometimes referred to as “401(K)-style” insurance, two recently created HRAs allow employers to reimburse medical expenses and/or insurance premiums tax-free.
Under these arrangements, employees purchase their 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.
QSEHRA
- 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 simultaneously. 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.
ICHRA
- 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 just to 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 eligible premium expenses only. 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 allow medical expenses to be reimbursed too. Note: Employers can 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, which can help direct you to the best arrangement for your business. 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 employees' most common HRA questions.
We are ready to chat on our website if you have any 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 updated with new information and insights for 2023.
