When providing your employees with a health benefit, more options are available than just traditional group health insurance. You can offer your employees a healthcare reimbursement for their medical expenses.
A healthcare reimbursement plan is a benefit where employers reimburse their employees for medical expenses. This differs from traditional group health plan coverage because the employer makes a benefit allowance available instead of choosing and administering a group health insurance policy from a carrier.
The term healthcare reimbursement plan has also been used to describe a type of Section 105 self-insured medical expense reimbursement plan (MERP) designed for premium reimbursement.
This article will explain how health reimbursement plans work and which reimbursement methods are available for organizations.
Definition of healthcare reimbursement plans
Healthcare reimbursement plans are employer-funded, tax-advantaged health benefit plans that allow organizations to reimburse employees for their medical expenses.
A healthcare reimbursement plan isn't health insurance. Instead, it's a way to provide allowances employees can use on their medical expenses, including insurance premiums.
Why are healthcare reimbursement plans becoming popular?
Healthcare reimbursement plans are growing in popularity for a variety of reasons.
The cost of group health insurance plans is increasing year over year, making it an unaffordable option for many small to medium-sized organizations looking to offer employee benefits. For other employers, group health insurance can 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 costs.
Health reimbursement plans are an excellent option for organizations of all sizes because they allow employees to choose the health insurance they want. Often with group health insurance coverage, employees aren’t able to use their preferred healthcare providers or health systems because they might be out of network. Employees can choose an individual health insurance plan that works best for them with a reimbursement plan.
Health reimbursement plans also allow employees to choose which medical expenses they want to get reimbursed, including out-of-pocket expenses. This gives employees more freedom and flexibility than other health benefits.
A reimbursement model can also improve the quality of care provided to employees because they can choose their healthcare providers.
How healthcare reimbursement plans work
There are many different healthcare reimbursement plans available for organizations to offer. However, each type can work differently.
Many healthcare reimbursement plans are formal arrangements 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 details about:
- Who is eligible
- What you can reimburse employees for
- How reimbursements are approved
- How payments are distributed
- 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 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 a healthcare reimbursement account be used for?
Depending on the healthcare reimbursement option you offer, employees can use them for various healthcare costs, such as the out-of-pocket costs of medical care.
For formal health benefits such as an HRA, you can only reimburse your employees for qualified medical expenses listed in IRS Publication 502. This generally excludes elective medical procedures in favor of expenses that are a medical necessity.
Health stipends can be used for virtually any medical expense, as there aren’t any restrictions on eligible expenses. This can be especially helpful for mental health expenses, as an HRA only allows you to reimburse mental health-related costs if you have a diagnosed mental illness.
What are the different types of healthcare reimbursement?
There are many types of reimbursement plans available, each with pros and cons.
Health reimbursement arrangement (HRA)
Health reimbursement arrangements (HRAs) are formal health benefits that allow you to reimburse your employees for qualifying medical expenses, including insurance premiums and 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.
One of the best features of an HRA is that reimbursements are tax-free for both employers and employees.
Three of the most popular types of HRAs are:
- Qualified small employer HRA (QSEHRA)
- A QSEHRA is specifically designed 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 W-2 employees. Employers can specify whether they wish to provide this benefit to full-time employees or full- and part-time employees.
- 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. An ICHRA can be offered by organizations of all sizes and features no monthly allowance caps. It requires an HRA notice to be sent to all eligible employees at least 90 days before the benefit is offered.
- Group coverage HRA (GCHRA), also known as an integrated HRA
- A GCHRA is best for employers who offer employees a traditional group health plan such as an HDHP and want to supplement their benefits. This helps employees with deductibles, copays, and eligible over-the-counter expenses.
If your organization has fewer than 50 FTEs and you don't plan on offering group health insurance, you can provide either a QSEHRA or ICHRA. However, a QSEHRA has an annual contribution limit of $5,450 for self-only employees and $11,050 for employees with families. 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.
Organizations with more than 50 FTEs are considered applicable large employers (ALEs). Under the Affordable Care Act (ACA)'s employer mandate, you're required to provide health coverage that meets minimum essential coverage (MEC) to at least 95% of full-time employees.
Thankfully, you don't need to offer a group health plan to satisfy the mandate. An HRA helps you meet this requirement as long as your employees have individual healthcare coverage that meets MEC.
Instead of providing your employees an HRA, you can offer them a health stipend. A health stipend is an informal form of reimbursement with fewer regulations and restrictions than an HRA.
A health stipend works similarly to an HRA, where employers can set a monthly allowance for their employees. This allows employees to be reimbursed for insurance premiums so that they can choose their preferred providers and healthcare systems, as well as out-of-pocket expenses.
This greater flexibility allows organizations to offer a stipend to 1099 contractors and international workers with ease. It can also benefit organizations with employees who receive federal advance premium tax credits (APTC), as they can use their health stipend while remaining eligible for their tax credits.
However, this increased flexibility comes with a cost. Health stipends are taxable under IRS Publication 15-B and must be reported on your employees' W-2s as income.
With a healthcare reimbursement plan such as an HRA or health stipend, your organization can provide a cost-effective alternative to traditional group health insurance. Personalized health benefits enable your employees to use their health benefits the way they want, improving the quality of patient care and employee satisfaction.
If you’re interested in offering a health benefit to your employees, PeopleKeep can help! Our HRA and employee stipend benefits administration software makes it easy to set up an employee health benefit in minutes.
This blog article was originally published on February 10, 2014. It was last updated on May 12, 2022.