Advantages of Reimbursing Employees for Individual Health Insurance

June 20, 2014

Small and medium-sized businesses are looking for more affordable ways to offer employee health benefits. As such, they are setting up formal plans to reimburse employees for individual health insurance.Fotolia_64379005_XS

The concept is simple. Don't offer group health insurance. Instead, offer employees a monthly healthcare allowance to use on individual health insurance.

Employees purchase their own health plan, and are reimbursed up to the amount available in their balance.

There are three clear advantages of offering health benefits in this way. 

This blog post is an excerpt from our eBook "The Step-by-Step Guide to Premium Reimbursement". Download the eBook here.

Three Big Advantages

#1: Individual Health Insurance Costs 20% to 60% Less then Group Health Insurance

Individual health insurance premiums cost up to 60% less than group health insurance. For example, see this state by state comparison of rates.

On top of this, most employees are eligible for a premium tax credit to lower what they will pay for individual health insurance. A recent analysis found that those who are eligible for tax credits pay, on average, only $82/month for a Marketplace health plan.

#2: Individual Health Insurance is Now Better for Employees

Second, individual health insurance is better for employees because of:

  • Choice – With individual health insurance, employees choose the coverage and doctors that best fit their family’s needs and budget.

  • Portability – Employees keep their health insurance when they leave the company because individual health plans are independent of employment.

  • Guaranteed-Issue - All employees (regardless of health conditions) are now able to purchase an individual health insurance policy that is equal or better for them than existing group health insurance options

See: 5 Reasons Employees Love Premium Reimbursement

#3: Employers Can Reimburse Employees for Health Insurance Premiums

Defined Contribution arrangements (aka Premium Reimbursement Programs) enable small businesses to offer employee health benefits for recruiting and retention purposes without absorbing the premium and administrative costs of sponsoring a traditional group health insurance plan. 

Employers have two options for setting up a formal Defined Contribution Health Plan:

  1. Taxable Health Care Allowance - With this approach, the business reimburses employees for their substantiated personal health insurance costs on a post-tax basis.

  2. Tax-free Healthcare Reimbursement Plan (HRP) - With this approach, the business uses a Section 105 Medical Reimbursement Plan to reimburse employees for their substantiated individual health insurance costs on a pre-tax basis. This type of plan is sometimes called a Healthcare Reimbursement Plan (HRP), and must be designed to comply with the Affordable Care Act's Market Reforms.

See: How to Set Up a Premium Reimbursement Program

Bottom line? Group health insurance is broken. By reimbursing individual health insurance, businesses are able to offer excellent health benefits at a controllable cost.

What questions do you have?

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