Because the cost of group health insurance is rising every year—for both employers and employees—some employers have sought alternative health benefit options. One popular alternative to group health is a health benefit that allows you to reimburse your employees for medical expenses.
Reimbursement benefits let you choose how much money you want to give your employees to spend on healthcare. With flexible options like a health reimbursement arrangement (HRA) or taxable stipend, you can customize your benefit to meet all your employees’ needs.
However, it can be challenging for employers to know how to use these benefits to offer 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.
What are the rules regarding health insurance reimbursement?
While health insurance reimbursement can take different forms, there are a few basic rules that most reimbursement benefits must follow.
First, formal reimbursement benefits, like HRAs, must have legal plan documents that outline the benefit’s details. This includes how much allowance the employer offers, what expenses are eligible for reimbursement, the plan administrator’s contact information, and other pertinent details. Employers must make these documents available to employees and keep them on file.
Second, the benefit must be truly reimbursable. Due to the 21st Century Cures Act, you can use an HRA to reimburse your employees, tax-free, for their health insurance premiums and other out-of-pocket costs. You can’t pay for your employees’ health insurance directly as that would be considered an employer payment plan, which is non-compliant.
Finally, 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 penalties for your organization.
However, 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, using a stipend or an HRA is a great way to provide a compliant reimbursable health benefit plan to your employees so they can cover their individual medical costs. Let’s take a closer look at how each of them works below.
Option #1: The qualified small employer HRA (QSEHRA)
If you’re a small employer, the best option for a reimbursable health benefit is the qualified small employer HRA (QSEHRA). A QSEHRA is for businesses with fewer than 50 full-time equivalent employees (FTEs) that don’t offer a traditional group health plan.
With a QSEHRA, you can reimburse your employees, tax-free, for their individual health insurance premiums and qualified out-of-pocket medical expenses.
The way the QSEHRA works is simple. Employees buy healthcare items and medical services and submit proof of the expense to their employer. Once you approve the employee’s submission, you reimburse them up to their available allowance amount.
You can set a monthly allowance amount that works with your budget, and only you can contribute to the HRA. It’s important to note that QSEHRAs have annual contribution limits set by the IRS. All full-time employees must receive the same allowance, but you can offer different amounts based on family status.
All reimbursements are free of payroll tax for the employer and income tax-free for employees as long as the employee is covered by a health insurance plan that provides minimum essential coverage (MEC).
Employees can still receive reimbursements if their policy doesn’t have essential coverage. However, you’ll need to report it on their W-2 as gross income so they can pay taxes on the amount received.
Option #2: The individual coverage HRA (ICHRA)
The individual coverage HRA (ICHRA) is similar to the QSEHRA but has the most customization options and is available to 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 different 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 individual health insurance coverage. Employees enrolled in a family member's group health insurance policy or an alternative benefit plan like a healthcare sharing ministry can’t participate.
ICHRAs can be a stand-alone health benefit or, if you have a traditional group health plan, offered to eligible employees not covered by your group plan. It’s important to remember that your employees can’t choose whether they want to participate in the ICHRA or the group plan. You need to offer them one or the other.
Option #3: The integrated HRA
If you offer traditional group health insurance and are looking to provide more value to your health benefit, you can do so by reimbursing employees for their out-of-pocket healthcare expenses with the integrated HRA, also known as a group coverage HRA (GCHRA).
The integrated HRA is for businesses of all sizes with group health plans. Expenses eligible for reimbursement are those not fully covered by the group health plan, such as copays, co-insurance, and costs paid toward a deductible.
You can also choose to allow reimbursement for items in IRS Code Section 213(d). However, traditional group health plan premium costs aren’t eligible for reimbursement.
Another aspect of integrated HRAs is that only employees enrolled in their employer’s group plan can participate in the benefit. And similar to the ICHRA, there is no annual contribution limit, and employers can offer different allowance amounts based on seven employee classes.
Option #4: The excepted benefit HRA (EBHRA)
Like the integrated HRA, the EBHRA is available to employers of any size with a traditional group health plan. It’s designed to reimburse employees for out-of-pocket costs listed in IRS Code 213(d) as well as “excepted” benefits.
Excepted benefits include copays, deductibles, and monthly premiums for vision and dental. It can’t reimburse individual health coverage, Medicare, or group coverage premiums.
Like the QSHERA, EBHRAs have annual contribution limits1 set by the IRS. In 2023, the maximum allowance you can contribute to an EBHRA is $1,950. EBHRAs can’t be offered alongside any other HRA and must be provided 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 is simpler to administer, you can go with a taxable stipend.
With a stipend, employees receive a fixed amount of money to help cover the cost of their health insurance policies and other medical expenses. You can offer as little or as much money as you like, and the funds are typically added to an employee’s paycheck or paid 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 they’re considered additional income, your employees have the flexibility to spend the funds on the health insurance companies and medical services that meet their needs.
Because they’re informal, 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 individual health insurance coverage or medical expenses.
Requiring this would make your stipend a group plan and, therefore, subject to IRS and ERISA compliance requirements. So there’s always a chance employees may use the money on non-healthcare-related items.
Stipends also don’t replace HRAs or group health insurance for organizations with 50 or more FTEs. That’s because stipends don’t satisfy the ACA’s employer mandate.
However, stipends offer great customization and give all employees added control over their healthcare. They’re particularly beneficial if you have many employees eligible for premium tax credits, as stipends don’t affect subsidy eligibility, unlike HRAs. They’re also handy if you employ many international workers or 1099 contractors, both of which are eligible for stipends.
If you’re considering offering a health benefit at your organization, you have many options. Offering a reimbursement benefit plan is an effective way for businesses to reduce costs while giving employees more freedom in their personal healthcare 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 or stipend is right for your company, PeopleKeep is ready to help! Simply schedule a call with one of our personalized benefits advisors, and we’ll get you on your way.
This article was originally published on February 17, 2020. It was last updated on May 8, 2023.