Reimbursing Employees for Health Insurance | What to know

Can a business reimburse an employee for health insurance premiums? This is a common question that many business owners ask, which leads them to the Take Command website. So, we’re glad you’re here and happy to explain the somewhat confusing health insurance game.

Employee Health Insurance Reimbursement

So can a business reimburse an employee for health insurance? The quick answer is “no”, at least not tax-free without some serious tax consequences. If your business reimburses employees for health insurance without a structured program, the IRS will treat the employer reimbursement of health insurance as income and insist that the employer pay payroll taxes and the employees recognize income tax. 

However, you can reimburse employees for health insurance on a tax-advantage way through programs like health reimbursement arrangements. A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for medical expenses, including insurance premiums and medications. An HRA gives businesses a tax-free way to contribute to their employee’s health coverage.

So what do you need to know about reimbursing employees for health insurance (in an IRS-friendly way)? 

Reimbursing Employees for Health Insurance

Since you’re here reading this blog, you’re likely considering an HRA because you want to lower your health plan expenses and provide your employees with high-quality health benefits. An HRA will give employees financial assistance to cover their qualified medical expenses. With various plan design options, you can decide which HRA plan works for you, how much you want to reimburse, and how to design the pre-tax health benefit plan that works best for you and your employees. 

HRAs are flexible tool that allows employees to choose a healthcare plan that works best for them and still enjoy the benefits of healthcare support.

Many modern companies are moving away from traditional group plans that can be rigid and unpredictable and toward new ways of offering benefits like HRAs. 

When you can work with an HRA administrator like Take Command to simplify the whole process, why not choose the easier path to reimbursing employees for health insurance? 

Qualified Small Employer Health Reimbursement Arrangement

Employers are moving toward a new way of offering health benefits that allows them to provide tax-free health coverage without the restrictions of traditional group insurance. When you sign up for an HRA for your business, you’ll give your employees the freedom to choose the health insurance plan that works best for them instead of being stuck with a one-size-fits-all group insurance plan most companies offer. 

With an HRA, your small business can provide tax-free reimbursements for qualified healthcare expenses, including premiums and coinsurance payments. HRA administrators, like Take Command, offer two main HRAs: Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) and Individual Coverage Health Reimbursement Arrangement (ICHRA). Each has a specific set of benefits that fit different types of businesses. 

What is a QSEHRA?

A QSEHRA allows small employers to provide non-taxed reimbursement of certain health care expenses, like health insurance premiums and coinsurance, to employees who maintain minimum essential coverage.

QSEHRA Rules:

What is an ICHRA? 

ICHRA is a company-funded health benefit that reimburses employees for healthcare expenses. Unlike a QSEHRA, the ICHRA is available for businesses of any size.

ICHRA Rules:

ICHRA does not have company size limits.
ICHRA can work alongside a group plan.
ICHRA does not have reimbursement limits.
ICHRA allows employers to designate different reimbursement amounts to different types of employees (seasonal, part-time, remote).
There are no maximum ICHRA benefits or contribution limits, so employers can decide to structure their ICHRA however they like. 

Check out our complete ICHRA guide that covers benefits, requirements, reimbursement rules, setup, administration, and faqs. What is ICHRA? Everything to know about Individual Coverage HRAs. A practical handbook for employers, brokers, and benefits professionals regarding the new Individual Coverage HRA. 

{Check out our demo and see for yourself how it works.} 

Individual Coverage Health Reimbursement Arrangement

When your business offers an HRA to employees, you’ll work with your HRA administrator to determine the best fit for your specific needs. Whichever option you choose, the Take Command team will help your employees select the best individual (or family) health insurance plan for their situation and understand how to use their new HRA.

This tax-advantage solution is a fundamentally new way of offering benefits and allows employers of any size to reimburse their employees for health insurance rather than buying it for them.

Let your employees choose what works best for them. They know their situation best. 

Health Reimbursement Arrangement FAQs

Q: What is a health reimbursement arrangement? 

A: A health reimbursement arrangement (HRA) is an employee reimbursement plan funded solely by the employer. This arrangement helps employees save money by on out-of-pocket health care expenses (like premiums, deductibles, copays, and other qualified medical expenses like prescriptions or other medications). Employees submit claims to the HRA administrator, and the employer issues a check for reimbursement. HRA funds are tax-deductible for employers and employee. 

Q: What are the IRS rules for health insurance reimbursement?

A: There’s a lot to cover in this, and the answer varies depending on the specific type of HRA you chose. Check out this blog post that takes a deeper look at the HRA rules for insurance reimbursements. 

Q: How does health insurance reimbursement work?

A: Employers set aside a specified amount of pre-tax dollars in their HRA account that pays for employee healthcare expenses. An HRA is funded solely by the employer, and employees submit claims for reimbursement to the HRA administrator, like Take Command, which makes it easy for employers to provide health benefits. 

Q: Can an employer reimburse an employee for health insurance in 2023?

A: Yes! But it needs to be through a structured program like an HRA. If you have a medical reimbursement plan, you can reimburse your employees’ healthcare expenses with your HRA. An HRA is designed to meet your health benefits needs and fit your budget. Check out our blogs that outline the 2023 ICHRA affordability rates and 2023 QSEHRA affordability rates. 

Q: Is health insurance reimbursement taxable?

A: No, health insurance reimbursement is not subject to payroll tax, income tax or employer tax. There is a tax benefit for you as an employer because you can deduct the amounts paid out of an HRA. 

Q: Is there a tax benefit for my employees?

A: Yes, HRA funds are contributed to employees on a pre-tax basis, so they are omitted when calculating taxable income.

Q: Can I reimburse my employee for health insurance premiums?

A: Health insurance premiums are among the list of things an employer can reimburse for through an HRA like ICHRA and QSEHRA. 

→ Check out this complete list of medical expenses that can be reimbursed with an HRA.

Q: How much can an employer contribute to their employees’ costs? 

A: Employers can decide how much they want to contribute toward their employees’ coverage HRA for each 12-month plan year. Read more about this in our employer HRA contributions guide.

Q: Can employees take money out of the HRA account? 

A: Since there is no pre-funding of accounts and it’s simply an “arrangement,” you cannot take funds out of the HRA account. Employees submit claims for qualified medical expenses, and the employer reimburses them from the pre-funded HRA account. An HRA is employer-funded with pre-tax contributions, whereas a health savings account (HSA) is employee-funded with pre-tax dollars. 

Get Started With Reimbursing Employees for Health Insurance 

For additional resources, check out our HRA Guide, QSEHRA Guide, ICHRA Guide, or ICHRA FAQ Page. Our team of HRA experts is ready to walk you through your options. Get in touch today! 

Additional Resources and Tools