What is healthcare reimbursement?

If you’re an employer considering a health benefit for your employees, more options are available than just traditional group health insurance. Rather than deal with a health insurance carrier to cover your employees' healthcare, you can simply reimburse them for their medical coverage and costs.

A healthcare reimbursement plan (HRP) is a benefit where employers reimburse employees for their qualifying medical expenses. This differs from traditional group health coverage because the employer makes a monetary allowance available instead of choosing and administering a group policy from a health insurer.

In this article, we'll explain how health reimbursement plans work, which reimbursement methods are available, and how PeopleKeep can help you offer a healthcare reimbursement benefit that's right for your organization.

Takeaways from this blog post:

• Healthcare reimbursement plans are becoming popular due to rising group health insurance costs, the flexibility they offer employees in choosing their healthcare providers, and their ability to cover a wide range of medical expenses.
• Healthcare reimbursement plans can vary in terms of eligibility, reimbursement process, and types of expenses covered, but generally involve employees submitting expenses for reimbursement and receiving a monthly allowance.
• Employers can use software like PeopleKeep to help administer healthcare reimbursement plans and ensure compliance with federal regulations.

Definition of healthcare reimbursement plans

Healthcare reimbursement plans are employer-funded, tax-advantaged health benefit plans that allow employers to reimburse employees for the cost of their medical needs.

A healthcare reimbursement plan isn't health insurance. Instead, it's a way to provide allowances employees can use on their medical care expenses, including monthly premiums for their own individual health insurance plans.

The term healthcare reimbursement plan also describes a type of Section 105 self-insured medical expense reimbursement plan (MERP) designed for premium reimbursement.

Why are healthcare reimbursement plans becoming popular?

Healthcare reimbursement plans are growing in popularity among employers. For example, individual coverage health reimbursement arrangements (ICHRAs) have grown by almost 350% since their introduction in 2020, reflecting the overall market expansion for all HRAs¹.

The cost of group health insurance typically increases year over year, making it an unaffordable option for many small to medium-sized organizations looking to offer employee benefits. For other employers, a traditional group health plan may be a headache to manage.

While options such as high deductible health plans (HDHPs) exist to help employers lower their benefit costs, they often leave employees with higher out-of-pocket expenses.

Health reimbursement plans are an excellent option for organizations of all sizes because they allow employees to choose the specific health insurance plan they want. With group health plan coverage, employees may not be able to access their preferred healthcare providers or health systems because they might be out of network. With a reimbursement plan, employees can choose an individual health insurance policy that allows them to access these preferred options.

Health reimbursement plans also allow employees to choose which medical care expenses they want reimbursed, including out-of-pocket expenses. This gives employees more freedom and flexibility than other health benefits.

How healthcare reimbursement plans work

There's a wide range of healthcare reimbursement plans available for organizations to offer. However, each one can work differently.

Many healthcare reimbursement plans are formal arrangements subject to ERISA that require legal plan documents, while others are informal health benefits.

Formal healthcare reimbursement plan documents must comply with all applicable federal regulations and include the following details:

• Guidance on eligibility
• What you can reimburse employees for
• How you approve reimbursements
• How you distribute payments
• What happens in the event of a decision dispute

The healthcare reimbursement process

Most health reimbursement plans allow employees to submit their medical expenses for reimbursement. Employers or third-party administrators (TPAs) can then approve or deny a request for reimbursement based on the plan's specific rules and regulations. Once approved, employers reimburse employees up to their monthly allowance.

What can you use a healthcare reimbursement plan for?

Depending on the healthcare reimbursement option you offer, employees can use it for various healthcare costs, such as the out-of-pocket costs of medical care.

For formal health benefits such as health reimbursement arrangements (HRAs), you can only reimburse your employees for qualified medical expenses the IRS outlines in Publication 502. This generally excludes elective medical procedures in favor of expenses that are a medical necessity.

What are the different types of healthcare reimbursement?

Many types of reimbursement plans are available, each with pros and cons.

Health reimbursement arrangement (HRA)

HRAs are formal health benefits that allow you to reimburse your employees for qualifying medical expenses, including individual health insurance premiums and other out-of-pocket expenses.

Instead of relying on per-diem reimbursement rates, employers can set a monthly or annual allowance for employees to use. Employers then reimburse employees up to their remaining allowance. Plus, any unused funds stay with the employer.

One of the best features of an HRA is that reimbursements are tax-free for both employers and employees as long as employees have insurance with minimum essential coverage (MEC).

Some of the most popular HRAs include:

• The qualified small employer HRA (QSEHRA): Congress specifically designed the QSEHRA for organizations with fewer than 50 full-time equivalent employees (FTEs). It's an excellent option for employers who want to keep things simple and offer a single benefit to all full-time W-2 employees. Employers can specify whether they wish to provide this benefit to only full-time employees or both full- and part-time employees. The IRS caps annual QSEHRA allowances based on family status.
• The individual coverage HRA (ICHRA): An ICHRA is one of the most flexible personalized health benefits. It allows employers to set different monthly allowances and determine employee eligibility based on classes. Organizations of all sizes can offer an ICHRA, and it features no monthly allowance caps. If you plan to offer an ICHRA, it’s a best practice to send an HRA notice to all eligible employees at least 90 days before offering the benefit.
• The group coverage HRA (GCHRA): The GCHRA, also known as an integrated HRA, is best for employers who offer employees a traditional group health plan such as an HDHP and want to supplement their medical benefits. This helps employees with deductibles, copays, and other eligible out-of-pocket expenses.
• The excepted benefit HRA (EBHRA): The EBRHA is similar to the GCHRA. It allows employers to reimburse employees for premiums paid toward certain excepted benefits and other eligible out-of-pocket medical care expenses.

If your organization has fewer than 50 FTEs and you don't plan on offering a traditional group health plan, you can provide either a QSEHRA or ICHRA. However, a QSEHRA has an annual contribution limit. If you want to offer your employees a larger allowance, then an ICHRA might be better.

With a QSEHRA or an ICHRA, employees can purchase individual health insurance coverage that works best with their preferred healthcare providers, giving them more coverage options. You can then reimburse employees for their insurance premiums.

The federal government considers organizations with 50 or more FTEs as applicable large employers (ALEs). Under the Affordable Care Act (ACA)'s employer mandate, ALEs must provide health coverage that meets MEC to at least 95% of full-time employees.

Thankfully, you don't need to offer a traditional group health plan to satisfy the mandate. An ICHRA helps you meet this requirement as long as you provide your employees with an allowance that meets minimum value and affordability standards.

How PeopleKeep can help

The rules and regulations surrounding the healthcare industry can be tricky to navigate. If you don't want to manage your health benefit on your own, PeopleKeep can help.

As an employee benefits administration software provider, PeopleKeep allows small employers to administer benefits to their employees in minutes, leaving them with more time to focus on running their company.

When you manage your HRA through PeopleKeep, our team will perform documentation reviews, provide customer support, and generate your plan documents to ensure compliance with HIPAA and ERISA.

Conclusion

You don't need to go through a health insurance company to offer your employees a healthcare benefit. With a healthcare reimbursement plan such as an HRA, your organization can provide a cost-effective alternative to traditional group health insurance. Personalized health benefits enable your employees to have more control over their health coverage and services, improving the quality of patient care and employee satisfaction.

Ready to offer an HRA to your team? Schedule a call with a personalized benefits advisor now!

This blog article was originally published on February 10, 2014. It was last updated on March 28, 2024.

1. https://hracouncil.wildapricot.org/resources/Documents/2022_HRAC_Data_FullReport_Final.p
2. https://www.irs.gov/publications/p15b