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Small Business Employee Benefits and HR Blog

Health Insurance Reimbursement - 5 FAQs

Small businesses, nonprofits, and health insurance professionals often have questions about health insurance reimbursement. FAQs_on_Health_Insurance_Reimbursement

This article covers five frequently asked questions (FAQs) about reimbursing employees for their individual or personal health insurance costs.

5 FAQs on Health Insurance Reimbursement

(1) Can Our Business Reimburse Employees' Individual Health Insurance in 2014?

Yes. Employers can reimburse employees for their individual health insurance. There are a few considerations that we'll cover next.

(2) Are Reimbursements for Employees' Individual Health Insurance Tax-Free?

They can be. An employer can utilize Section 105 of the Internal Revenue Code to establish a formal self-insured medical reimbursement plan to reimburse employees for their substantiated individual health insurance costs on a pre-tax basis. This type of plan is also called a Healthcare Reimbursement Plan (HRP).

When providing tax-free reimbursement of individual health insurance policies through an HRP, the employer must ensure compliance with federal regulations, including but not limited to legal plan documents, summary plan descriptions, and new “Market Reforms” required by the Affordable Care Act.

(3) What Types of Health Insurance Can We Reimburse?

When a business uses an HRP, the following types of insurance premiums can be reimbursed provided they were not already paid with pre-tax dollars:

  • 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, and employer-sponsored health insurance premiums

  • Medicare Advantage and Supplement premiums

  • COBRA premiums

  • Long-term care premiums

For a complete list, see this article or IRS Publication 502.

(4) If I Reimburse Employees' Individual Health Insurance, Will They Still Be Eligible for a Premium Tax Credit?

They can be. Offering reimbursement through an HRP does not disqualify employees from the premium tax credits.

(5) How Do Companies Track and Manage Reimbursements?

Because of compliance considerations (see #2 above), nearly all businesses use a Defined Contribution Software provider to set up the HRP to ensure compliance. In addition to compliance, Defined Contribution software tracks and manages reimbursements, and makes administration of reimbursements easy for the business.

This type of approach -- reimbursing employees for their health insurance expenses -- is gaining popularity among small and medium sized business. Many call this approach Health Insurance Allowances or "Pure" Defined Contribution.

What questions do you have about health insurance reimbursement?