Health insurance reimbursements: What are the options?

The cost of traditional group health insurance is rising every year, leaving some business owners seeking alternative health benefit options. One popular alternative to group coverage is a health benefit that allows you to reimburse your employees for their premiums and out-of-pocket medical expenses.

Reimbursement benefits let you choose how much money you want to give your employees to spend on medical care. With flexible options like a health reimbursement arrangement (HRA) or taxable stipend, you can customize your benefit to meet your employees’ needs. However, employers must know how to use these benefits to offer healthcare reimbursements compliantly.

This article will give you everything you need to know about health insurance reimbursements and the five coverage options that can work for your organization.

In this blog post, you’ll learn:

• The five main healthcare reimbursement options available to employers and how each works.
• How reimbursement benefits can help your organization save money while giving employees more control over their healthcare.
• The key differences between health reimbursement arrangements (HRAs) and taxable employee stipends.

What are the rules regarding health insurance reimbursement?

While healthcare reimbursement can take different forms, most reimbursement benefits must follow a few basic rules.

Here are the general requirements:

1. ERISA plan document compliance. Under Section 402 of ERISA, formal healthcare reimbursement benefits, like HRAs, must have legal plan documents outlining the details of the benefits. This includes the allowance amount, eligible expenses, the plan administrator’s contact information, and other pertinent details.
   1. Employers must make these documents and a summary plan description (SPD) available to employees and keep them on file.
2. The benefit must be truly reimbursable. Due to the 21st Century Cures Act, you can use an HRA to reimburse your employees for their health insurance premiums and other out-of-pocket expenses tax-free.
   1. You can’t pay for your employees’ individual health insurance directly because the IRS considers this a non-compliant employer payment plan.
   2. An exception to this rule is automatic payments with an individual coverage HRA (ICHRA). According to the ICHRA Final Rules¹, reimbursement “may include employee-initiated payments through the use of financial instruments, such as pre-paid debit cards, as well as direct payments, individual or aggregate, by the employer, employee organization, or other plan sponsor to the health insurance issuer.”
3. The benefit must follow applicable federal health plan rules in ERISA, HIPAA, COBRA, and the Affordable Care Act (ACA). Failure to follow all federal requirements can result in costly tax penalties.
   1. Some benefit plans aren’t subject to these rules. For example, stipends aren’t formal benefits and therefore aren’t subject to ERISA federal compliance regulations, like HRAs. However, because it isn’t a formal benefit, you can’t require employees to submit receipts for medical expenses or prove they have health coverage.

Whichever option you choose, offering a stipend or an HRA is a great way to provide your employees with a compliant reimbursable benefit plan so they can cover their healthcare costs. Let’s take a closer look at how each of them works below.

Option #1: The qualified small employer HRA (QSEHRA)

One of the best reimbursable health benefits for small businesses is the qualified small employer HRA (QSEHRA). A QSEHRA is an employer-funded benefit for companies with fewer than 50 full-time equivalent employees (FTEs) that don’t offer a traditional group health plan or ancillary group policy.

With a QSEHRA, you can reimburse your employees, tax-free, for their individual health insurance premiums and qualified out-of-pocket medical expenses. Eligible costs include mental health services, medical equipment, prescription drugs, and more.

The way the QSEHRA works is simple:

1. You set a monthly allowance amount that works with your budget. Keep in mind that QSEHRAs have annual contribution limits set by the IRS. Additionally, all full-time employees must receive the same allowance, but you can offer different amounts based on age or family status.
   1. You can also extend the benefit to part-time workers as long as you give them the same allowance amount as your full-time staff.
2. Employees enroll in their preferred individual health insurance plan and buy out-of-pocket medical care. To participate in the QSEHRA, they must have a health plan that provides minimum essential coverage (MEC). This means employees with coverage through their spouse’s or parents’ group health plan can still participate in the QSEHRA if you allow reimbursement for out-of-pocket medical expenses.
3. After purchasing an eligible healthcare item or service, employees submit proof of the expense to you or your QSEHRA’s plan administrator.
4. Once you approve the employee’s claim documentation, you reimburse them up to their available allowance amount. Once they reach their monthly allowance limit, they can’t exceed it.
5. All QSEHRA reimbursements are free of payroll tax for you and income tax-free for your employees.

Option #2: The individual coverage HRA (ICHRA)

The individual coverage HRA (ICHRA) is similar to the QSEHRA in that it’s a tax-advantaged health benefit plan. However, it has more customization options and is for businesses of all sizes. Employers offering an ICHRA aren't subject to annual contribution limits, so you can offer as much or as little allowance as your budget allows.

Additionally, ICHRAs allow you to offer different allowance amounts to separate groups of employees based on 11 employee classes, providing more flexibility and personalization. Each class of employees must be based on job-specific criteria to prevent discrimination.

The ICHRA is only available to employees with qualifying individual health coverage. This includes qualified health plans sold on public or private exchanges, most student health plans, and Medicare Parts A and B. Employees enrolled in a family member's group health insurance policy or an alternative benefit plan like a healthcare sharing ministry can’t participate.

The ICHRA can be a stand-alone benefit or offered alongside traditional group coverage. However, you can’t give employees within the same class with both benefits or offer them the choice between the two.

Option #3: The integrated HRA

Suppose you already offer traditional group coverage and want to add more value to your health benefits package. In that case, you can reimburse employees for their out-of-pocket healthcare expenses with an integrated HRA.

Also known as a group coverage HRA (GCHRA), the integrated HRA is for businesses of all sizes with group health plans. Eligible expenses for reimbursement include medical services and items the group plan doesn’t fully cover, including copays, coinsurance, and deductible payments. However, group plan monthly premiums aren’t eligible for reimbursement.

Only employees enrolled in their employer’s group plan can participate in the benefit. And similar to the ICHRA, there are no annual contribution limits, and employers can vary eligibility rules and allowance amounts based on seven employee classes.

Option #4: The excepted benefit HRA (EBHRA)

Like the integrated HRA, the excepted benefit HRA (EBHRA) is for employers of any size who offer a traditional group health plan. With an EBHRA, you can reimburse employees for out-of-pocket expenses listed in IRS Code 213 and “excepted” benefits².

Under the ACA, excepted benefits include:

• Copayments
• Deductibles
• Monthly premiums for vision, dental, and cancer insurance plans
  • EBHRAs can’t reimburse individual health coverage, Medicare, or group coverage premiums.
• Supplemental health benefits
• Short-term and long-term care insurance
• Workers compensation coverage

Like the QSHERA, the IRS sets annual contribution limits for the EBHRA³. In 2025, the maximum allowance you can contribute to an EBHRA is $2,150.

Additionally, you can’t offer an EBHRA alongside any other HRA and must provide it to every employee under the same terms and conditions.

Option #5: The taxable stipend

If you’re looking for an option with fewer regulations that’s easier to administer, go with a taxable health stipend.

With a stipend, employees receive a fixed amount of money to help cover the cost of their health insurance policies and other out-of-pocket medical expenses. There are no contribution limits, so you can offer as little or as much money as you like. Most employers add the extra funds to an employee’s paycheck or pay them out with a separate check.

Stipends are taxable because they’re essentially grossing up wages. Business owners must pay payroll tax, and employees pay income taxes on the amount they receive during tax time. But, since the IRS considers stipends extra income, your employees have the flexibility to spend their funds on a wide range of health insurance premiums and medical services.

Because they’re informal benefits, you can’t legally require your employees to use their money to purchase medical services and items. You also can’t ask them to show proof that they used their allowance on health insurance coverage. Requiring this would make your stipend a group plan and subject to IRS and ERISA compliance requirements. So, there’s always a chance that employees may use the money on non-healthcare-related items.

Lastly, stipends don’t satisfy the ACA’s employer mandate for organizations with 50 or more FTEs. However, they’re particularly beneficial if you have many employees who qualify for premium tax credits, as stipends don’t affect subsidy eligibility, unlike HRAs. They’re also handy if you employ international workers or 1099 contractors, both of which are eligible for stipends.

Conclusion

If you’re considering offering a health benefit at your organization, you have many options. Offering a healthcare reimbursement benefit plan is an effective way for businesses to reduce costs while giving employees more freedom in their personal medical decisions. And because HRAs and stipends can work for employers of any size, you’re sure to find a perfect solution.

If you think an HRA is right for your company, PeopleKeep by Remodel Health is ready to help! Simply book a call with one of our HRA specialists, and we’ll get you on your way.

This article was originally published on February 17, 2020. It was last updated on September 8, 2025.

1. Federal Register - Health Reimbursement Arrangements and Other Account-Based Group Health Plans

2. IRS Code Section 213(d)

3. 26 CFR 601.602