Find out how health insurance reimbursements work for a small business.
A health insurance reimbursement serves as a tax-advantaged way for an employer to reimburse employees for qualified medical expenses. Continue reading to learn more about how a health insurance reimbursement works specifically for a small business.
What is a health reimbursement arrangement (HRA)?
An integrated health reimbursement arrangement, also called a health reimbursement account and usually referred to as an HRA, provides a monthly, tax-free allowance for employees to pay for their medical expenses. Workers formally submit proof of their medical costs to their employer, who then reimburses employees for qualified expenses from their monthly allowance.
While terms and conditions vary depending on the type of HRA, here is an overview of how a health reimbursement arrangement typically works:
- A qualifying small business creates an IRS-approved HRA account on an employee’s behalf, placing a certain amount of money in the account based on whether the HRA is for a single employee or an employee with a family.
- The employee with the HRA account can then purchase their own individual or family health insurance plan (or enroll in the employer’s qualified high-deductible group plan for a group coverage HRA) through private exchanges like eHealth.com or from an insurance company.
- The employee can apply the money in their HRA toward paying for monthly premiums, or particular out of pocket costs such as deductibles, copays, and coinsurance.
An HRA benefit must also follow applicable federal rules such as the Affordable Care Act (ACA). Note that employees receiving HRA contributions usually will not be eligible for government subsidies when they purchase health coverage on their own through a government health exchange.
What is a QSEHRA?
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a type of HRA for a small business with less than 50 employees that does not offer a group health insurance plan. A QSEHRA allows a small business to give workers a tax-free allowance every month, which employees can choose how to spend and can be reimbursed for qualified medical expenses by their employer.
One benefit of this health insurance reimbursement option is that, by setting a budget for their employees, a small business does not have to select a one-plan-fits-all health plan for their entire workforce. This means that employees can decide how much they want to spend on their health plan. For instance, older employees with families might spend more compared to younger employees, or employees who already have health insurance through their spouse might want to spend less.
To learn more about setting up a QSEHRA, visit the IRS website.
How does a health insurance reimbursement compare to a group health insurance plan?
A health insurance reimbursement is not really an alternative to group health coverage, and instead functions as a way to supplement a health insurance plan, primarily by helping employees pay for particular out-of-pocket medical expenses.
While a small business splits the cost of monthly premiums with employees through an employer-sponsored health insurance plan, employers are the only ones who contribute to an HRA account in order to later reimburse their employees. Money in an HRA account also belongs to the business.
To qualify for tax advantages, a health insurance reimbursement arrangement usually needs to work with health insurance that meets minimum essential coverage according to the ACA.
Overall, depending on your budget preferences and coverage needs, a health insurance reimbursement may be a worthwhile option for your small business to consider in lieu of, or in addition to, a group health plan.
To get more information about how a health insurance reimbursement works for a small business, speak with an accountant or legal and tax advisor.
Visit eHealth.com or talk with one of our licensed agents to learn more about your small business health insurance options today.
This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.