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Small business health insurance is getting more expensive every year. A popular and effective way to avoid these costs is to cancel group coverage and reimburse employees for individual health care expenses instead.
With a reimbursement benefit, small businesses can decide how much they want to spend toward their employees’ health care. They can also avoid the cumbersome administrative requirements of group benefits.
But with health care policy perpetually changing, it’s hard for small businesses to keep track of which reimbursement benefits are compliant and which aren’t.
In this post, we’ll go over the latest federal guidelines to help you understand your options for health insurance reimbursement in 2020.
Health insurance reimbursement: What are the rules?
While health insurance reimbursement can take different forms, there are a few basic rules that all reimbursement benefits must follow.
First, formal plan documents must govern the benefit. That means a business can’t simply ask employees to present receipts and then reimburse their health care costs. Instead, the business must have formal guidelines in place, record them in legal documents, and make those documents available to employees if they ask to see them.
Second, the benefit must truly be a reimbursement benefit. Businesses cannot pay for employee’s health care directly—this type of arrangement is considered an employer payment plan and is currently noncompliant.
Within these guidelines, there are four compliant approaches to health expense reimbursement in 2020.
Option #1: Offering a group coverage HRA
Small businesses with larger budgets may choose to retain group health insurance, but offer a comparatively less expensive high-deductible health plan (HDHP) instead.
To make up for some of the loss in value, these businesses could offer a group-integrated health reimbursement arrangement (HRA) as well.
With a group-integrated HRA, the business chooses a monthly benefit allowance of tax-free money to offer each employee enrolled in the group policy. Employees then buy what fits their personal needs and submit proof of the expense to their business. The company reviews the employee’s submission and, if it qualifies, reimburses the employee from their monthly allowance for that expense.
Group-integrated HRAs typically reimburse deductible or coinsurance expenses that are also covered under the group health insurance plan. Businesses can also choose to expand eligible expenses to any item listed in IRS Code Section 213(d), apart from personal insurance premiums.
Option #2: Offering a one-person stand-alone HRA
Very small businesses may find success with a one-person stand-alone HRA.
With this HRA, one employee is entitled to a monthly allowance of tax-free money. The employee then buys what fits their personal needs and submits proof of the expense to their company. The company reviews the employee’s submission and reimburses the employee from their monthly allowance.
With a one-person stand-alone HRA, there are no contribution limits, and the employee can be reimbursed for any item listed in IRS Code Section 213(d), though the business may choose to limit this list.
Option #3: Offering a qualified small employer HRA (QSEHRA)
For small businesses that want to offer a reimbursement benefit to more than one employee, the best choice is the qualified small employer HRA (QSEHRA).
With the QSEHRA, the business chooses a monthly benefit allowance of tax-free money to offer each employee. In 2019, QSEHRA contribution limits say annual employee allowances cannot exceed $5,150 for self-only employees and $10,450 for employees with a family. Additionally, all full-time employees must receive the same allowance, though the business can offer different amounts based on family status.
Employees then buy what fits their personal needs and submit expenses to their company. The company reviews the employee’s submission and reimburses the employee from their monthly allowance.
With a QSEHRA, employees can be reimbursed for any item listed in IRS Code Section 213(d), though the business may choose to limit this list.
+Because it’s available to all businesses with fewer than 50 employees and isn’t offered alongside a group policy, the QSEHRA is the most popular reimbursement benefit among small businesses.
Option #4: Offering an informal wage increase
Due to the expense and complexity of establishing formal plan documents, some businesses choose to implement an informal wage increase instead. This isn’t a true reimbursement benefit, but businesses that take this route feel it helps employees with health care costs while avoiding additional paperwork.
With an informal wage increase, the business raises all employees’ wages and tells employees the additional funds are meant for health care.
There are three major downsides to this option, though. First, the extra funds given to employees are taxable for both the business and its employees. Second, the business has no legal way to ensure employees are using the wage increase on health care. And finally, employees are unlikely to consider the funds a true health benefit. That may defeat the business’s original purpose in giving the wage increase.
Option #5: Offering an individual coverage HRA (ICHRA)
The ICHRA is similar to the QSEHRA, though it comes with fewer restrictions. Businesses offering the individual coverage HRA aren't subject to contribution limits, for example, and businesses can offer different allowance amounts based on certain employee classes. However, the HRA is only available to employees enrolled in individual health insurance. Employees enrolled in a family member's group policy or an alternative benefit like a health care sharing ministry can’t participate.
For more information, see our post on the ICHRA vs. QSEHRA.
Option #6: Offering an excepted benefit HRA
The excepted benefit HRA is available to businesses with a group health insurance policy, and allows the company to reimburse employees for other out-of-pocket medical expenses. The HRA is capped at $1,800 per year per employee, and can’t be offered with any other HRA.
Offering a health reimbursement benefit is an effective way for small businesses to cut benefits costs while giving employees more freedom in their personal health care decisions.
Editor's Note: This blog was originally published in November 2018 and has been updated to reflect the most recent information.