If you have questions about health insurance reimbursement being considered income, you’re not alone. Health reimbursement arrangements (HRAs) have been around for years now but have really gained traction recently as regulatory changes gave them more accessible and more employers learn about all of the advantages they have to offer. One question we hear often is, “Is health insurance reimbursement considered income when an employer is reimbursing employees for health insurance? or Is Health Insurance Reimbursement taxable?” We'll answer that today, but first...a refresher.
How health reimbursement works
A health reimbursement arrangement, or HRA for short, refers to an arrangement between employers and their employees to reimburse for medical expenses and/or insurance premiums tax-free.
The purpose of reimbursement health insurance is for employers to help their employees afford rising healthcare costs and avoid the pitfalls of expensive, one-size-fits-all group plans.
The employer chooses an HRA for his or 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. The funds can be reimbursed via payroll and if the employee doesn't use all of the monthly allowance, the funds stay with the employer.
An HRA is not a bank account. This can be a little confusing at first, but it’s actually much simpler. Unlike Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) that are accounts, an HRA is simply an Arrangement.
We often get asked if business owners have to pre-fund their account or send money to our account so we can distribute it to their employees. The answer is no to both questions—the money stays with the employer until an employee makes a claim that qualifies for reimbursement. If employees never make claims or don’t claim the full amount, the employer keeps it all!
Advantages of health insurance reimbursement
There are LOTS of reasons why we are big fans of health insurance reimbursement. Here are a few...
- Transfers employer responsibility for health risks.
- Transfers health decision making from employer to employee.
- More personalized plan choices for employees. No employee is locked into a plan that might not be a good fit for them. They can also take their plan with them if they leave.
- Simpler and more flexible plan design options.
- Greater budget control.
- No participation concerns.
Is health insurance reimbursement considered income?
No. 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, reimbursing employees for health insurance counts as a tax deduction.
How to get started
Take Command is a recognized leader in QSEHRA administration, ICHRA administration, and small business HRA tax strategy. Is your company or client going to be a part of this exciting employer-based benefits revolution?
Chat with our team with any questions you may have about these tax-friendly benefits or check out our many HRA posts for more information on the background, setup process, requirements, rules and what to look for in an HRA administrator.
This post was originally published in 2020 and has been updated with new information and insights for 2024.
