When it comes to reimbursing health insurance premiums, there are two health reimbursement arrangements (HRAs) to choose from. The QSEHRA (qualified small employer HRA) and the ICHRA (individual coverage HRA) are the only health reimbursement arrangements that allow employers to reimburse employees tax-free for health insurance premiums and qualified medical expenses.
Reimbursing health insurance premiums with an HRA
There are two different kinds of HRAs that are relatively new to the market that allow employers to reimburse for health insurance premiums. Let's dive in to the differences between the two.
QSEHRA is designed for employers with less than 50 employees to reimburse for premiums and medical expenses if the plan allows. There are annual contribution limits that change each year.
ICHRA is for companies of any size. There are no limits to how much an employer can offer for reimbursement. This is a big difference with QSEHRA which has rather restrictive limits. With ICHRA, employers can offer as much or as little as they’d like as long as it’s offered fairly to each class.
These can be easily confused with other tax-advantaged tools like HSAs and FSAs, but HRAs are unique.
→ Compare HRAs vs HSAs vs FSAs in more detail.
In addition, employers can choose what they want their ICHRA to reimburse:
- Insurance Premiums Only
- Insurance Premiums + Qualified Medical Expenses
- Qualified Medical Expenses Only
Employers can also choose how to structure reimbursements to employees:
- Give all employees the same amount: for example, give all employees $200/mo.
- Vary reimbursements by family size: Since individual market plans cost more for families, employers can offer more for larger families. For example, an employer could offer $200 for single employees, $300 for married employees, and $600 for employees with families.
- Vary reimbursements by employee age: Similarly, since individual plans typically cost more for older employees, employers can elect to offer higher reimbursement amounts to older employees. Reimbursements must be structured using a 1:3 ratio from the youngest to the oldest employee. We strongly recommend setting it using the age range from 26 to 64. For example, you could give a 26 year old $100/mo and a 64 year old $300/mo.
- Vary by both family size and age: Combo of the above options.
Employee Requirements fo reimbursing health insurance premiums
For employees to participate in QSEHRA, they must have a plan that meets Minimum Essential Coverage Requirements.
For employees to participate in ICHRA and receive reimbursements, they must be covered by a qualified individual health plan. For a plan to be considered “qualified,” it must meet two primary requirements:
- Have no annual or lifetime limits (PHS 2711)
- Cover preventive health services with no cost sharing (PHS 2713)
While employees will have many options on the individual market, unfortunately the rules do not allow for employees to consider getting on their spouse’s group plan (if offered by the spouse’s employer). This is a big bummer, especially since QSEHRA works great with employees on their spouse’s group plan.
In addition, we know there are a lot of enticing alternative plans on the market now based on short-term plans, fixed indemnity plans, and sharing ministries. Although these alternative plans may provide great coverage, they will not work with ICHRA.
Pro-Tip: If you or your client are interested in alternative plans or have many employees with access to spouse plans, you may want to consider QSEHRA as it can work with a wider variety of plan types. See our Guide on QSEHRA Reimbursements.
What can be reimbursed with an HRA?
Employers have a lot of flexibility over what employee medical expenses are 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 a few choices employers can make:
- 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. Eligible expenses include doctor visits, copays, dental cleanings, prescriptions, eye glasses, diabetes supplies, etc. Note: Employers can choose to exclude categories of expenses (i.e., “prescriptions”) as long as the exclusion is applied fairly to everyone.
- Premiums of employees on their spouse’s group plan: Many small business and non-profit employees have access to traditional group health insurance plans through their spouse. This is great because it takes the primary insurance burden off of the small employer! However, employees may still have to pay something to participate in their spouse’s plan (usually a deduction on the spouse’s paycheck). Employers setting up a QSEHRA can choose whether or not to allow employees to make claims for these group plan premiums. ICHRA, however, does not reimburse for spouse's plan premiums. Note: In most cases, these claims will be taxable to the employee because the spouse is likely making a payroll deduction on a pre-tax basis.
Ready for the next step?
If you still have questions about reimbursing health insurance premiums, we have a slew of resources available for you, and a group of experts standing by. Check out our comprehensive guides to HRAs, ICHRA and QSEHRA. Try out our ICHRA affordability calculator to see how this HRA can benefit your business.
Or just reach out with one of our team! We're here for you.
