- Small business health insurance costs are rising every year, and employers are on the lookout for ways to reduce their own costs and also partner with their employees to lower their costs as much as possible.
- There are several ways to reimburse an employee for healthcare costs, such as offering a health reimbursement arrangement.
- While healthcare insurance and its related reimbursements can take many forms, there are important federal rules that employers must follow.
- This article is for small business owners and human resources professionals who want to learn about health insurance reimbursements, how they work and what options are available to them.
When it comes to health insurance, employers have a lot of options. Often, the biggest deciding factor on which route to go comes down to price for both employers and employees. Most small business owners understand the value of offering health insurance to their employees, but sometimes the rising costs make it difficult for employees to take advantage of the offer. To help employees, some employers wonder if they can pay some of the costs. There are several reimbursement options for employers; the key is understanding the correct ways to go about it.
Can employers reimburse employees for health insurance?
There are several ways to reimburse employees for health insurance-related costs. However, if you don't use a pretax shelter provided by the IRS, such as a health reimbursement arrangement (HRA), there could be significant tax consequences.
HRAs are employer-funded and -owned group health plans that allow employees to be reimbursed, tax-free, for some medical expenses. There is a cap on how much money employees can be reimbursed each year. Any money that isn't used during a plan year can be rolled over to the following year.
When employers offer HRAs over group health insurance, it is generally due to the ease of the program's oversight (group health insurance plans are quite involved for some administrative teams) and budgetary concerns (due to the cost of healthcare). In addition, HRAs allow companies to better manage their annual budgets and offer several tax advantages.
According to CMS.gov, some HRAs can work alongside a group health insurance plan, which is designed to assist employees with their costs related to deductibles, copays and other out-of-pocket expenses.
The underlying advantage is that programs like an HRA allows employers to actively show how important employees are to them by helping look after their health. This helps businesses retain top talent over time, which allows the organization to grow and take on new challenges with engaged team members supporting the efforts.
Qualified small employer health reimbursement arrangement (QSEHRA)
The other significant option for small businesses is the qualified small employer health reimbursement arrangement, which is designed as a way for smaller businesses (those with fewer than 50 employees) to offset some of their employees' healthcare costs.
According to HealthCare.gov, a QSEHRA gives small businesses the ability to provide nontaxed reimbursement of some healthcare expenses, like premium and coinsurance payments. To be eligible, employers must offer healthcare coverage that meets the ACA requirements, including an individual marketplace plan.
In addition to having fewer than 50 full-time employees, employers must provide the same reimbursement terms to all full-time employees (specific reimbursement amounts can vary by age and how people in a household are covered under the plan) and not offer a group health plan, like the Small Business Health Options Program (SHOP) or a flexible spending account (FSA).
The maximum QSEHRA benefits or contributions in 2020 were $5,250 ($437.50 monthly) for employee-only coverage and $10,600 ($833.33 monthly) for employee and household coverage. Understanding the caps for each employee in the program you offer is important, as it relates to an employee's growing burden in absorbing annually increasing healthcare costs. Even though it's not the employer's fault that healthcare costs rise each year, it is beneficial to have a clear picture of what employees are experiencing in the universe of healthcare costs.
Research from the Kaiser Family Foundation shows that a family of four covered under employer-sponsored health insurance was spending about $3,300 between premiums and out-of-pocket expenses in 2003. At that time, employers were contributing more than $7,000 to the total coverage costs. In 2018, those numbers had increased to more than $7,700 in employee expenses and $15,000 in employer costs.
Key takeaway: Although you can offer health insurance reimbursements to your employees, you must execute the program within a tax shelter such as an HRA. HRAs are designed by the IRS to reduce healthcare costs for employees.
What rules must health insurance reimbursements follow?
Whichever health insurance reimbursement program you use, you need to follow certain rules. Confirmation of a standard and legal HRA program entails more than just supplying receipts for expenses:
- Plan documents: Plan documents outline the reimbursement program, its do's and don'ts, and what the IRS requires via the Employee Retirement Income Security Act (ERISA).
- Proof of reimbursement: All HRA programs must offer reimbursement and cannot pay for employees' health insurance costs directly.
- Health plan rules: All of the most common HRA program options must comply with ERISA, HIPAA, COBRA and the ACA.
Key takeaway: Even though HRAs and QSEHRAs are not directly governed under the ACA, you must follow ERISA, IRS and other regulations to remain compliant. For example, you must submit proof that employees' costs were reimbursed rather than paid for directly.
How to reimburse employees for health insurance costs
There are several ways to reimburse employees for their healthcare expenses. These are the four options that offer IRS-governed, pretax benefits for health insurance needs:
As we have addressed, a QSEHRA allows the business to select a monthly benefit cap, or allowance of tax-free money to offer each employee. Note that all full-time employees must receive the same allowance amount.
Group or individual (stand-alone) coverage HRAs
Within a group or stand-alone coverage HRA, employers can offer HRA options that meet the legal requirements and offer financial relief to employees. The group coverage HRA targets small employers that offer a high-deductible health plan. Group coverage HRAs can be compatible with other group health insurance programs.
With group-affiliated HRAs, employers select a monthly benefit allowance of tax-free money to offer each enrolled employee. Employees then purchase what they need throughout the month, saving their receipts for the employer to review. Once the review process is complete and the expense is approved, the employer reimburses the employee up to the monthly cap they've set.
Employers execute the stand-alone program the same way they would a group coverage HRA. The employee has a set amount of pretax money each month, and the employee submits receipts for their qualifying expenses. Also, there are no IRS-regulated contribution caps on stand-alone HRAs, so the employee can be reimbursed for any qualifying expense the IRS lists.
Individual coverage HRA (ICHRA)
Congress finalized the newest HRA program type, the individual coverage HRA, in 2019. As of Jan. 1, 2020, employers can offer an ICHRA, which means they can reimburse employees tax-free for health insurance purchased on the open market. This allows the employer to essentially provide health insurance benefits without maintaining a conventional group health insurance plan.
Excepted benefit HRA (EBHRA)
The excepted benefit HRA allows employers of any size to use pretax dollars to reimburse certain benefits. For plan years beginning on or after Jan. 1, 2020, the individual limit is $1,800 (carryover amounts are not counted in the annual limits). Note that employers may not offer both an EBHRA and an ICHRA to the same employee.
Of course, there is always the option of employee wage increases. However, this can be problematic, as these dollars are taxed as income to the employee and employers set a potential precedent that pay raises can be offered whenever certain aspects of the cost of living go up.
Key takeaway: Employers have several options of HRAs for employees. The four main types – QSEHRA, group or individual coverage, ICHRA, and EBHRA – are pretax in nature and offer advantages for both the employer and employees.