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A Health Reimbursement Plan May Be Exactly What Your Small Business Needs

Written by: PeopleKeep Team
April 22, 2015 at 7:00 AM

There are many advantages in offering a Health Reimbursement Plan. Before outlining these advantages, we should understand what they are, and how they work.

What are Health Reimbursement Plans?Health_Reimbursement_Plan_2

A Health Reimbursement Plan, or HRP, is a reimbursement plan structured to reimburse employees for health insurance premiums up to a specified monthly allowance, and also includes unlimited preventive care with no cost sharing. In other words, a Health Reimbursement Plan gives the employer control over the cost of benefits, while giving employees control over their choice of health plan.

How do Health Reimbursement Plans Work?

The general strategy of a Health Reimbursement Plan is:

  • The employer implements a Section 105 Medical Reimbursement Plan to give each employee a fixed monthly healthcare allowance to spend on an individual health plan.  This is also known as a “Pure” Defined Contribution Plan.  There are no limits to the amount that can be contributed by the employer, and no minimum participation requirements.

  • Employees select and purchase the individual or family health plan of their choice. Employees may purchase their own policy directly from any health insurance company, through a broker, or from the state Health Insurance Marketplaces.

  • The employer reimburses employees for their health care expense, up to the amount of their HRP allowance. In other words, an HRP is a notional arrangement where no funds are expensed until reimbursements are paid and pre-funding is not required. Through an HRP, employers reimburse employees directly only after the employees incur an approved health care expense.

The Advantages

Now that we know what a Health Reimbursement Plan is, and how it works, we can explore the many advantages of an HRP:

  • Defined costs. Health Reimbursement Plans are designed to control costs for the employer. Since the employer can define allowances for different roles within the company, they can predict and control their health benefit costs.

  • No limits. Employers can contribute as much or as little as they wish as long as they apply contributions fairly to each class of employee. There is no minimum participation required, no plan maximums, and an employer or employee can cancel out of the plan at any time without penalty.

  • Save time administering the plan.  Defined Contribution Software Administration reporting features make real-time monitoring of Healthcare Reimbursement Plan (HRP) liabilities, reimbursements, and utilization easy.

  • Reimbursements are tax-free!  By using Defined Contribution Software, employers can maintain compliance with the IRS and ensure their benefits are tax-free.


Understanding the many advantages of a Health Reimbursement Plan is the first step for small businesses to offer affordable health benefits and save money and time. They are solely funded by the employer, they save time and are simple to use, there are no contribution limits, and they are tax free. They control costs for employers and allow flexibility and portability for employees.

Questions about Health Reimbursement Plans? Add them below and we will answer!

Topics: Health Reimbursement Arrangement

Additional Resources

Trying to decide which HRA is best for you? Take our quiz to find out.
Get our guide on how to offer health benefits with a small budget.