Wondering if employer reimbursement for health insurance is possible? While tax free reimbursement used to be a common practice for small business owners, the Affordable Care Act had the unintended consequence of disallowing tax-free reimbursement for small companies. Luckily the 21st Century Cures Act resulted in a really awesome solution: the health reimbursement arrangement. What's more, now businesses of any size can reimburse for health insurance tax free. Let's dig in to how health reimbursement plans work.
Let's start with a little context.
Previously, the primary hang-up for tax-free reimbursement for small businesses was an interpretation that any company that reimbursed for health insurance (including individual) was technically a group plan.
Under the Affordable Care Act (ACA), your reimbursements actually constitute a group health plan called an Employer Payment Plan (EPP)—albeit a non-compliant one. The penalty is $100 per employee per day, according to the IRS.
Yeesh. Not worth the risk.
Reimbursing health insurance or medical expenses is not like reimbursing for a bus ticket or office supplies. The reason is the IRS treats employee medical reimbursements for health insurance and medical expenses like a salary payment to employees (IRS Notice 2013-54). Salaries require payroll taxes to be withheld by employers and income tax to be paid by employees.
So, the IRS treats health insurance reimbursements as income and insists that employers pay payroll taxes and the employees recognize income tax, up until a relatively recent loophole.
New health reimbursement arrangements like ICHRA and QSEHRA allow employers to reimburse health insurance costs on a tax-advantaged basis, reaping the same level of tax benefits as corporations are accustomed to.
HRAs aren’t subject to payroll taxes or income taxes, making it a tax benefit for both the employer and employee.
Employer reimbursement for health insurance with an HRA
HRA stands for “Health Reimbursement Arrangement”. They are not overly complicated or scary but are built on a series of regulations to make sure they are being offered fairly and are achieving their intended aim of helping employees pay for benefits tax-free.
How this new model of employee insurance works is pretty simple.
The employer chooses an HRA for 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.
That’s the basic idea, but we’ve got a comprehensive small business guide to the HRA for you!
Let’s look now at the two main HRAs we’re excited about.
Types of HRAs
ICHRA stands for the individual coverage HRA. This tax-advantaged tool allows companies of any size to reimburse employees for health insurance with no contribution limits. Known as a "defined contribution" model or 401(K) style of insurance, ICHRA can be an alternative to or used in conjunction with traditional group insurance.
The key distinction to the ICHRA is that it 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. This allows for a higher degree of efficiency when it comes to spending your benefits budget.
QSEHRA stands for the qualified small employer HRA. This HRA, which is also known as a small business 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.
QSEHRA works similarly to the ICHRA: Employees pay for their own health insurance and medical bills and provide proof of their expenses. Employers then reimburse the employee up to the set limit - for 2021 those limits are $5300/year for individuals, and $10,700/year for families. The contribution limits are unique to this type of HRA. The ICHRA doesn’t set a limit.
→ Learn more about HRA individual health insurance options.
→ Learn more about how tax-advantaged HRAs win over medical stipends.
Why should I offer an HRA?
You probably already know this, but health insurance benefits are almost as important as salary when it comes to the best employee retention strategies for small businesses.
That means it’s in your best interest to offer your employees insurance, even if you’re not required to (for businesses with under 50 employees).
And that’s what makes the HRAs such a great option! Your employees are really going to appreciate the personalized benefits that an HRA can offer: that an HRA allows them to choose their own plan and keep their favorite doctors.
Plus, they can take their plan with them if they leave.
HRAs offer budget control, risk mitigation, predictable costs and streamlined benefits for employers and personalization and portability for employees.
→ See if the HRA insurance model is for you!
We're here to help!
Need help making sense of how to get the most out of these two great tax-friendly tools?
→ Check out our top 5 Health Reimbursement Arrangement rules to remember here.
→ Read more about Employer HRA Contributions.
Our team of HRA experts is at the ready to chat with you on our website. You can also check out our guide on small business tax strategies or our HRA Guide for more ideas on how to play it smart.
A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.