Can I reimburse employees for health insurance?

Rising healthcare costs can put a strain on your employees’ wallets. As you revamp your company’s employee benefits package, you may wonder if you can reimburse your staff for health insurance. Yes, you can. Not only does this allow you to support your workers better, but it’s also an excellent way to attract and retain talent at your company.

Two popular options allow you to reimburse employees for individual health insurance coverage: a health reimbursement arrangement (HRA) or a stipend. While this is good news, your next question may be, “Is employer reimbursement for health insurance taxable?”

HRAs and stipends can both support your employees’ medical needs. However, they have guidelines and tax regulations that employers must follow to reimburse their staff compliantly.

In this blog post, you’ll learn:

• The differences between HRAs and health stipends, including how they work and their tax implications.
• Which health insurance premiums are eligible for reimbursement under an HRA and stipend.
• Why business owners can’t directly pay for employees' health insurance plans.

How does an HRA work?

First, let’s review how health insurance reimbursement works with an HRA. An HRA is an employer-sponsored health benefit that allows employees to receive tax-free reimbursements for health insurance premiums and other qualified out-of-pocket medical costs.

With an HRA, eligible employees buy their own individual health plan coverage through a public or private exchange. They can also buy other eligible medical expenses, such as prescription drugs and doctor visits.

Once the employee buys an eligible expense, they submit proof of purchase for the service or item. Then, the employer reimburses them tax-free up to their allowance amount, typically through their paycheck with pre-tax dollars.

Only the employer can fund the HRA—there are no employee contributions. You also can’t fund the benefit through employee payroll deductions. Any unused funds at the end of the plan year stay with you. Employers also keep any unused allowances if an employee quits or retires.

The best part about HRAs is that they have tax advantages. Reimbursements are payroll tax-free for both the eligible employer and employee. An HRA is also free of income tax for the employee.

An HRA must follow IRS regulations to receive these tax benefits, including setting up formal plan documents.

You can boost your compensation package with the HRAs in the following sections.

Individual coverage HRA (ICHRA)

The individual coverage HRA (ICHRA) is for businesses of any size. It’s an excellent alternative to traditional group health plans. There’s no minimum or maximum contribution limit with the ICHRA. Business owners can vary allowances and benefit eligibility using employee classes. Classes include groups like hourly employees, salaried employees, or workers in a particular state.

Employees must have a qualifying form of individual health coverage to participate.

Qualified small employer HRA (QSEHRA)

The qualified small employer HRA (QSEHRA) is for companies with fewer than 50 full-time equivalent employees (FTEs) that don’t offer a group or ancillary plan. It has no minimum employer contribution limits. But, the IRS sets annual maximum limits.

Employees must have a health plan that provides minimum essential coverage (MEC) to participate. Since an individual plan isn’t required, your employees with coverage through a spouse’s or parent’s group plan can take part in the benefit.

Which health insurance premiums can an HRA reimburse?

The QSEHRA and the ICHRA can cover a wide range of medical expenses—and health insurance premiums are no exception. It’s important to know which premiums are eligible so your employees can fully take advantage of their HRA benefits.

Here are a few types of health insurance premiums that are eligible for reimbursement:

• Individual health insurance. This includes public or private exchange plans, student health insurance, and VA health plans.
  • HRAs can reimburse Medicaid premiums. Medicaid provides MEC, so an employee can participate in a QSEHRA. But, it isn’t individual coverage. While these types of premiums are also eligible under the ICHRA, it’s unlikely an employee will have a Medicaid plan to reimburse. That’s because they need individual coverage to participate.
• COBRA insurance
• Supplemental health coverage, such as short-term and multiplan insurance
• Ancillary insurance, such as dental and vision coverage

If you’re wondering if a company can reimburse an employee for Medicare premiums, you’re in luck. Employees can leverage their HRA to reimburse Medicare healthcare premiums. But there are conditions for each type of HRA, so be sure to read the regulations carefully.

How does a health insurance stipend work?

With a health stipend, you offer your employees a fixed, taxable amount of money to help them pay for health insurance and other medical expenses. Employers typically add their contributions to their employees' paychecks or give them as a separate check.

Stipends have a few notable perks, including:

• They’re easier to administer than other health benefits since they’re not subject to as many compliance requirements.
• They’re flexible, so your employees can spend their money on whatever healthcare expenses best fit their needs.
• Current employees can participate in the stipend and collect their full premium tax credit.
  • Stipends can increase employees’ annual household income, which may affect the amount of their premium tax credit.

A drawback of stipends is that the IRS treats money for the insurance stipend as taxable income for the employee. Business owners must also pay payroll taxes on reimbursements.

If your organization has 50 or more FTEs, you’re subject to the ACA’s employer mandate. This means you must offer a formal ACA-compliant health plan to at least 95% of your full-time employees. A stipend doesn’t satisfy the mandate. However, an ICHRA can.

Which health insurance premiums can a stipend reimburse?

Stipends don’t have to follow many Affordable Care Act (ACA) regulations since it isn’t insurance. So, your employees can use their benefits to pay for any health insurance premiums they want.

This includes premiums that a QSEHRA and ICHRA can reimburse and others that HRAs don’t, such as:

• Fixed lump sum policies
• Healthcare sharing ministries
• Cash benefits plans
• A parent’s health insurance policy
• Direct care membership plans

Even if you want your employees to use their stipend on monthly premiums and other healthcare services, requiring them to submit proof that they bought medical items is illegal. You also can't require employees to provide proof of payment for a health insurance policy. So, there isn’t any accountability for how your employees spend their stipend dollars.

Can I pay for employees’ health insurance coverage directly?

When the federal government implemented the ACA, employers could no longer reimburse employees for individual health insurance premiums. They could offer salary increases to cover the expense. But, there was no way to provide the money on a pre-tax basis or ensure that employees spent the money on a health plan.

Luckily, the 21st Century Cures Act of 2016 reestablished HRAs as a flexible way to reimburse employees for their health insurance premiums on a tax-free basis.¹

The IRS considers paying for your employees’ coverage without an HRA, qualified spending account, or other formal health benefit an employer payment plan. If you do so, you may be subject to Employee Retirement Income Security Act (ERISA) and ACA penalties.

Even though you can’t pay for your staff’s health insurance and medical costs outright, don't worry. Using a stipend or an HRA is an excellent way to provide affordable health coverage while following all federal regulations.

Conclusion

When it comes to health insurance, you have many coverage options. The most significant deciding factors are budget, flexibility, and whether you want to offer a traditional group health plan. But a taxable health stipend or an HRA are great options to reimburse your employees for health coverage.

If you think an HRA would suit your organization, PeopleKeep can help! Our HRA administration software allows you to manage your health benefits in minutes each month. We even handle the complex compliance requirements so you can reimburse employees without the hassle. Schedule a call with one of our HRA specialists, and we’ll get you on your way.

This article was originally published on January 24, 2022. It was last updated on December 2, 2024.

1. SHRM - 21st Century Cures Act