If you’re a small business owner you might be wondering, “What is insurance reimbursement?” Perhaps you’ve heard of an alternative to the traditional pricey, one-size-fits-all group plans but aren’t sure how they work or what the options are. Take Command is here to clear that up for you! Let’s walk through how HRAs, or health reimbursement arrangements, work and the tax-advantaged options you have.
What is a health reimbursement arrangement?
Health reimbursement arrangements make it possible for employers to reimburse employees for health insurance. Sometimes referred to as “401(K)-style” insurance, two recently created HRAs allow an employer to reimburse for medical expenses and/or insurance premiums on a tax-free basis. Under this arrangement, employees purchase their own 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.
HRAs are built on a series of regulations to make sure they are being offered fairly and are achieving their intended aim, which is to help employees pay for benefits tax-free. The regulations also do their best to prevent the reimbursements from being used for unfair things, like executive compensation, fraud, discrimination, money laundering, etc.
Tax Code Section 105 is the regulations that cover this type of tax-friendly tool. That's why you'll hear industry folks toss around the term "Section 105 HRAs."
What are the options for insurance reimbursement?
There are two kinds of health reimbursement arrangements that you need to know about.
- 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 at the same time. 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 contribution limits), let your employees choose the plan that works best for them, and reimburse them when they submit receipts!
- The individual coverage HRA (ICHRA) 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.
Check out our CEO’s thoughts at BenefitsPRO on how the ICHRA has potential to reshape the way employers pay for benefits.
- 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, reimbursements made by the company count as a tax deduction.
We meet many small business owners who try to help their employees by giving them a bonus or adding to their salaries to help with health insurance, unfortunately, that triggers payroll and income taxes that end up wasting 20-40% of the bonus before an employee ever gets to use it.
Pro-tip: For companies that help employees with health insurance by offering a health stipend or by adding to employee salaries, tax-free reimbursement will typically have a huge tax advantage for both employer and employee.
For example, if a 10-person company offers employees $300/mo ($3,000/mo in total reimbursement) by increasing salaries versus tax-free through a QSEHRA, $1,200 a month ends up going to taxes each month.
Take Command can help with insurance reimbursement!
Need help sorting through the details of your HRA options and finding the right one for you? Our team of experts are on hand to help. Just chat with us on our website, or check out one of our helpful guides on our favorite HRAs, like our ICHRA Guide and QSEHRA Guide.