Editor's Note: This article was written in April 2013 and some information may be outdated as it pertains to HRAs and individual health insurance reimbursement. For current information, see: FAQ - Can Employers Reimburse Employees' Individual Health Insurance in 2015?
Yes. Done correctly, a business is allowed to use a Health Reimbursement Arrangement, also called a Health Reimbursement Account or HRA, to contribute tax-free to employees' individual health insurance plans. This type of medical reimbursement is similar to the way a business can contribute to group health insurance premiums on a tax-free basis.
HRA for Premium Reimbursement
With a Section 105 HRA, any business can contribute to employees' individual health insurance plans tax-free. An HRA is a tax-advantaged plan that employees can use to receive reimbursement for qualified medical expenses, including individual health insurance plans. HRAs are 100% funded by employers. This type of arrangement, where the HRA is not linked to a group plan, is often called a Stand-Alone HRA.
The key is that the business uses a compliant Section 105 HRA plan or other IRS/HIPAA/ERISA-qualified tax-free vehicle. Why? The U.S. federal government has specific regulations that employers must comply with in order to reimburse employees for individual health insurance plans without triggering ERISA plan status for the individual health insurance policies, violating HIPAA-privacy rules, or violating federal income tax regulations.
These regulations prohibit employers from paying directly for employee's medical expenses, including health insurance premiums, outside of an HRA or other ERISA-qualified group health benefits plan. By correctly using an HRA and HRA Software, an employer stays compliant with the IRS, HIPAA and ERISA.
For example, to comply with ERISA, an HRA assures that all employees in a given class receive the same level of benefits and that benefits are disclosed to employees. To comply with HIPAA, an HRA protects employee privacy by ensuring that employers are not aware of which specific medical items, including personal health insurance policies, are purchased by employees.
Some businesses might want to pay directly for an employee's individual health insurance plans without utilizing an ERISA and HIPAA-compliant HRA, but doing so may put the business out of compliance with federal regulations and may increase the business's (and employee's) tax liability.
HRA Premium Reimbursement - Types of Eligible Premiums
The following types of insurance premiums are eligible for HRA premium reimbursement:
Major medical individual health insurance premiums
Limited benefit individual health insurance premiums
Dental care and Vision care premiums
Qualified Ancillary premiums (e.g. accident policies)
Medicare Part A or B, Medicare HMO
Employer-sponsored health insurance premiums
Medicare Advantage and Supplement premiums
These are outlined in the IRS Publication 502 under "Insurance Premiums". An HRA can also be used to reimburse employees for other eligible medical expenses such as doctor visits, co-pays, prescriptions, hospital visits, vision, dental, etc. The employer sets which types of medical expenses to reimburse.
HRA Premium Reimbursement Post-2014
With key health care reform changes being implemented in 2014, a common question is "will HRAs be able to reimburse individual health insurance plans post-2014?" The answer is yes. HRA premium reimbursement will continue to be available to employers.
How? The types of medical expenses that can be reimbursed through an HRA are governed by IRC Section 105(b), IRC Section 213(d) and IRS Publication 969. This includes reimbursement of individual health insurance premiums. Nothing in these codes or publications has changed with health care reform laws.
Why the confusion? On January 24th, 2013, the Department of Labor released a new set of FAQs clarifying which type of HRAs will be considered "integrated" HRAs (integrated with a group health plan). PHS Act Section 2711 does not affect an HRA's ability (under Section 105) to reimburse health insurance premiums. For a more detailed explanation of HRAs and health care reform see: Stand-alone HRAs Can Still Reimburse Health Insurance Premiums.