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FAQ – Can We Provide Tax-Free Dollars to Employees’ Personal Insurance?

Written by: PeopleKeep Team
November 20, 2015 at 12:00 PM

Health insurance costs are one of the biggest stressors of running a small business. FAQ - Can We Provide Pre-Tax Dollars to Employees’ Personal Insurance?While most employers expect health insurance costs to go up each year, many turn to employer-funded individual health insurance models that allow businesses to predict and control costs from the beginning by providing tax-free dollars toward employees' personal insurance. These plans offer unique benefits to both employees and employers, but can it still be done? Yes. As long as the health plan satisfies new regulations set forth by the Affordable Care Act, employers may still provide tax-free dollars to employees’ personal insurance using a compliant healthcare reimbursement plan.

Tax-Free Benefits to Your Employees

Individual health insurance plans purchased on the Exchange are significantly less expensive than the group plans typically offered by companies to their employees. So shouldn’t there be a way for businesses to tap into the Exchange without sacrificing an employer healthcare contribution?

With an employer-funded individual insurance model, an allowance is set, and the money spent on health insurance each month is reimbursed through payroll for the individual. Using a compliant Section 105 healthcare reimbursement plan, the reimbursements are tax-deductible to the business and received tax-free by employees. This allows employees to create and tailor their own insurance plans while still receiving a tax-advantaged benefit from the company. It’s a win-win for employers and employees alike.

Another benefit to these plans is that employees are allowed to tap into the tax credits given by the federal government for purchasing insurance. This provides additional cost savings for both entities – putting money back in the pockets of your employees and decreasing your costs overall.

While the lower costs and benefits to employers are unique and valuable, the main benefits come to your employees through:

  • Tailored, individualized health plans they can choose themselves
  • Tax-free savings on health insurance plans
  • Tax credits by the federal government each year


Small business owners are able to provide tax-free dollars to employees' personal insurance by using a formal, compliant healthcare reimbursement plan. This is important, as employers using non-compliant reimbursement or payment arrangements may face steep penalties this year. Cost containment in regards to health insurance is one of the biggest challenges small businesses face, and new employer-funded individual health insurance models are revolutionizing the world of employee benefits.

Has your business benefitted from providing tax-free dollars to employees’ personal insurance? Leave a comment below.

Topics: Health Reimbursement Arrangement, Health Insurance