To avoid the hassle of traditional group insurance plans, you may be wondering how to reimburse your employees for health insurance. It’s possible through health reimbursement arrangements, or HRAs. Employers of all sizes now have more flexibility when it comes to reimbursing employees for health insurance, tax-free. This is a huge win for business owners who are looking for a more affordable, efficient way to offer small business health insurance to their teams without having to hassle with a pricey, one-size-fits-all group plan. Let’s discuss your options!
Where do Health Reimbursement Arrangements come from?
Tax-free reimbursement used to be a common practice for small business owners. However, when the Affordable Care Act (“Obamacare”) passed in 2010, the law had the unintended consequence of disallowing tax-free reimbursement for small companies. The primary hang-up was an interpretation that any company that reimbursed for health insurance (including individual) was technically a group plan. According to the ACA, group plans are required to provide preventive care at no cost. Since employers that reimbursed for individual plans did not meet the preventive care requirements, they would be subject to group plan penalties of up to $100 per employee per day.
While Congress addressed the hotly debated topic of "Obamacare," little was done to help fix the problem. In late 2015 the IRS started enforcing the provision and leveraging hefty fines and penalties for companies caught reimbursing for individual health insurance.
In late 2016, the bipartisan 21st Century Cures Act was signed into law by President Obama that opened up the doors for health reimbursement arrangements for small employers. Three years later, regulatory rule updates allowed for this same treatment to be used by employers of all sizes and with a greater degree of flexibility.
HRAs: the better way
An HRA allows business owners to reimburse their employees on a tax-free basis for health insurance premiums or qualified medical expenses.
Most importantly, HRAs allow business owners to avoid the penalties and fees and taxes we discussed.
The mechanics of an HRA are surprisingly simple. At a high-level, employees pay for their own health expenses and employers reimburse them. Here’s how it works:
- 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
Know your HRA options
QSEHRA: a Qualified Small Employer HRA allows small employers to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. This means employers get to offer benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and employees can choose the plan they want. The key thing to remember here is that all employees must be reimbursed at the same level. The QSEHRA is designed for employers with less than 50 employees to reimburse for premiums and medical expenses if the plan allows.
ICHRA: an Individual Coverage HRA allows employers of any size to reimburse any amount per month for healthcare expenses incurred by employees on a tax-free basis, starting at any time of the year. The distinguishing element of this HRA is that employees can be divided into an unlimited number of classes, like hourly vs. salary or even based on location, and be reimbursed at different levels. The ICHRA is for companies of any size. There are no limits to how much an employer can offer for reimbursement.
How to reimburse employees for health insurance
We make it easy for employees to just snap a picture of their receipts for reimbursement, and 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.
- 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.
Take Command can help!
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.