Editor's Note: This article was written prior to Technical Release 2013-03 and parts of the article may no longer be applicable in regards to stand-alone HRAs. For an updated article on how to reimburse employees for their personal policy premiums, see: Can Employers Reimburse Employees' Individual Health Insurance in 2014?
A common question from employers is "Can I reimburse employees for the cost of their personal policy premiums?" Yes. By using an IRS-approved HRA, employers can provide tax free reimbursement to employees for their personal premium policies in a compliant way.
From a regulatory standpoint, this is allowed because the HRA itself is the "Plan," not the healthcare items purchased with the HRA. Let's look at this further.
The HRA is the Plan
The HRA is considered the plan, not the personal premiums purchased with HRA funds.
HRAs are qualified ERISA- and HIPAA-compliant group health benefits plans. As such, employees in the same HRA class must receive the same HRA allowances.
However, the medical items (including personal health policy premiums) that each employee chooses, are not considered part of the qualified group health benefits plan.
For this reason, HRAs are allowed in every state to reimburse employees tax-free for their personal policy premiums (or other out-of-pocket medical expenses), even though employees typically pay different amounts for personal policy premiums and medical purchases.
HRAs Allowed for Employee Reimbursement of Personal Premium Policies
Employers are allowed to use HRAs to reimburse employees tax-free for personal health insurance premiums, similar to the way employers contribute on a tax-free basis to group premiums.
The U.S. Treasury and State have published numerous publications over the years confirming how employers can use HRAs for tax-free reimbursement of the premiums paid for personal premium policies. For example, see "Insurance Premiums" in IRS Publication 502, the HRA section in IRS Publication 969, and IRS Notice 2002-45 (HRAs).
By using an HRA provider, employers can stay 100% compliant with HIPAA and ERISA regulations that govern the distribution of personal health insurance policies at the workplace. These regulations basically restrict employer involvement with the sale or administration of employee's personal health policies. HRAs allow an employer to provide reimbursement for their personal policy premiums in a compliant way.