As you think through the costs and features of your employee benefits package, you may wonder if you can reimburse your employees for health insurance.
Luckily, there are options that allow you to reimburse employees for individual health insurance coverage, such as a taxable stipend or a health reimbursement arrangement (HRA).
However, there are guidelines for both that employers must follow to reimburse their employees compliantly. This article will cover taxable stipends and HRAs and how these two coverage options can work for your organization.
Learn more about health reimbursement arrangements in our guide
How does a taxable stipend work?
With a taxable stipend, employees receive a fixed, taxable amount of money to help cover the cost of their health insurance and other medical expenses. Stipends have their perks, such as being easier to administer since they’re not subject to as many compliance requirements as most traditional group health plans. Employer contributions are typically added to employees' paychecks or given as a separate check.
Stipends can be particularly helpful if you have a lot of employees that qualify for premium tax credits, as stipends don’t affect premium tax credit eligibility. However, stipends increase employees’ annual household income, which may affect their premium tax credit size.
One drawback with stipends is that they come with taxes. Business owners must pay payroll tax, and employees must claim the stipend as taxable income on their tax return.
Additionally, employees don’t need to prove that they are using a stipend to purchase individual health insurance coverage or medical expenses, so there isn’t any accountability for how the money is spent.
How does a tax-free HRA work?
Another alternative to a standard health insurance plan is an HRA. With a formal, tax-free HRA, you set a fixed allowance for your eligible employees to use to pay for their health insurance premiums and other medical care expenses referenced in IRS Publication 502.
Unlike a stipend, business owners don’t pay anything until an employee submits proof of the incurred healthcare expenses with a receipt or invoice. Only employer contributions are allowed—employee contributions to an HRA aren’t permitted. Also, any unused allowance at the end of the plan year stays with you, even if your employee quits or retires.
With an HRA, employees purchase their own health plan coverage through a health insurance exchange, like the federal Marketplace, a state-based exchange, or directly from a health insurance company. Employer reimbursements are made monthly up to the employees’ allowance amount, typically through their paycheck with pre-tax dollars.
If you have current employees on Medicare, then you’re in luck. HRAs can be a medical reimbursement tool for Medicare healthcare premiums, but there are conditions for each type of HRA, so be sure to read the regulations carefully.
For example, some HRAs require employees to have individual health insurance policies, while others only work with group health insurance plans.
With an HRA administration software provider like PeopleKeep, you can administer a health benefit to your employees in just minutes every month. We handle the legal documents and compliance requirements while you reimburse employees for their approved expenses. You can boost your compensation package with the HRAs in the following sections.
Qualified small employer HRA (QSEHRA)
A QSEHRA is for small employers with fewer than 50 full-time equivalent employees (FTEs). Like other HRAs, QSEHRAs reimburse employees, tax-free, for their medical expenses, including individual health insurance premiums up to a set contributed allowance amount.
With the QSEHRA, all reimbursement amounts are free of payroll tax for the employer and income tax-free for employees as long as their health insurance policy provides minimum essential coverage (MEC).
Business owners must remember that with a QSEHRA, you must reimburse all employees at the same level. Therefore, you can’t offer a QSEHRA alongside a traditional group health plan. However, you can offer a stipend and a QSEHRA simultaneously if you want to provide more flexible spending options to your employees.
Individual coverage HRA (ICHRA)
An ICHRA allows employers of all sizes to reimburse any amount per month for individual health insurance coverage, including healthcare premiums and medical expenses incurred by employees on a tax-free basis. ICHRAs can be a stand-alone health benefit or offered to employees not covered by an organization’s group plan.
An important element of the ICHRA is that employees can be divided into classes, like hourly vs. salary, or even based on location, and be reimbursed at different levels.
Can I pay for employees’ health insurance directly?
When the federal government implemented the Affordable Care Act (ACA), business owners weren’t allowed to reimburse employees for the cost of individual or family health coverage. Pay raises were permitted, but there was no way to provide the money on a pre-tax basis or require the money to be spent on health plan coverage.
The 21st Century Cures Act reestablished HRAs as a way to reimburse employees for their health insurance premiums tax-free.
Now, paying for individual coverage without a stipend, HRA, qualified spending account, or other formal health benefit is considered an employer payment plan, leading to Employee Retirement Income Security Act (ERISA) violations for being out of compliance with the ACA.
So while you can’t pay for your employees' health insurance and medical costs outright, using a stipend or an HRA is a good way to provide affordable health coverage for your employees while still staying compliant.
When it comes to health insurance coverage, you have many options. Typically, the most significant deciding factors are budget, flexibility, and whether or not you want to go with a traditional group health plan. However, a taxable health stipend or an HRA are great options if you want to reimburse your employees for health insurance.
If you think an HRA or stipend would suit your organization, PeopleKeep can help! Simply schedule a call with one of our personalized benefits advisors, and we’ll get you on your way.
This article was originally published on January 24, 2022. It was last updated on January 27, 2023.