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Small Business Employee Benefits and HR Blog

FAQ - Can We Use an HSA to Reimburse Employees for Health Insurance?

Your small business doesn’t offer health insurance, but you’d like to help employees with the coverage they’ve purchased on their own. In this FAQ article, we’ll answer a common small business question, “Can we use a Health Savings Account (HSA) to reimburse employees for their health insurance?” Can We Use an HSA to Reimburse Employees for Health Insurance?

Can We Use an HSA to Reimburse Employees for Health Insurance?

The simple answer is no. Under most circumstances, an HSA cannot be used for health insurance premiums. (There are a few exceptions. We’ll talk about these next.)

So, if your business wants to reimburse employees for their individually-purchased health insurance, an HSA is generally not the appropriate vehicle.

To understand this further, let’s boil down how an HSA works.

How an HSA Works

An HSA is a type of medical reimbursement plan. Simply put, an HSA is a financial account established by an individual to pay for qualified medical expenses.

HSAs must be linked with a qualified high-deductible health insurance plan, and anyone can contribute to the account (employer, employee, or third party).

Employees may spend the HSA money tax-free on qualified out-of-pocket medical expenses, as determined by the IRS (see IRS Publication 502 and IRS Publication 969). Qualified expenses include deductibles, co-payments for medical care, prescription drugs, or bills not covered by insurance such as vision and dental care.

In regards to health insurance premiums, an HSA may not be used on premiums except for:

  1. Long-term care insurance.

  2. Health care continuation coverage (such as coverage under COBRA).

  3. Health care coverage while receiving unemployment compensation under federal or state law.

  4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

Other Ways to Help Employees with Health Insurance

If an HSA is not the solution for helping employees with their individually-purchased health insurance, what is? The most common medical reimbursement plan is a Health Reimbursement Plan, or HRP.

An HRP is an employer-funded, tax-advantaged benefit designed to reimburse employees for individual health insurance premiums. An HRP is a type of Section 105 Self Insured Medical Reimbursement Plan.

Conclusion

Are HSAs commonly used by employers to help with employees pay for individually-purchased health insurance? No. However, a popular vehicle used to reimburse health insurance premiums is a Section 105 Health Reimbursement Plan, or HRP.

What questions do you have about how to help employees with the cost of individual health insurance? Leave a comment and we’ll help answer.

The Comprehensive Guide to the Small Business HRA