.

How to Give Employees Tax-Free Money for Health Insurance

July 31, 2015
XL_office_desk_work_hero

How to Help Employees with Health Insurance Tax-FreeYour small business does not offer traditional health insurance coverage, but you want to help with employees’ insurance costs. As such, your business gives employees a taxable raise or bonus to use toward healthcare.

But here’s a thought. Your small business could save money, and contribute more to employees’ healthcare, by setting up a tax-advantaged reimbursement plan.

Tax-Free Money for Employees’ Health Insurance?

Yes, it is still possible. Employers can reimburse employees tax-free for their health insurance expenses by using a formal, compliant health reimbursement plan.

The key here is to use a compliant health reimbursement plan. Under health reform, there are new rules for reimbursing employees’ health insurance expenses and new penalties for non-compliance. The penalties are steep - up to $100 per day, per employee.

In other words, employers may still use reimbursement plans for health insurance premiums as long as they follow the new rules.

What Does a Tax-Free Reimbursement Plan Look Like?

Employers may use a self-insured medical reimbursement plan, sometimes called a Healthcare Reimbursement Plan (HRP). Here’s how it works:

  • The business establishes an HRP to give employees a monthly healthcare contribution (“allowance”).

  • Employees purchase their own health plan and submit reimbursement requests through the HRP. Generally, a third party reviews the reimbursement request.

  • The business then reimburses employees, up to their available balance.

Learn more about how HRPs work (downloadable PDF).

4 Steps to Give Employees Tax-Free Money for Health Insurance

To set up a tax-free reimbursement plan, follow these four simple steps.

1. Determine a Timeline

If the business is currently helping employees with taxable bonuses or raises, or another type of health benefis, consider the timing of switching to a tax-free reimbursement plan.

2. Create a Budget

Decide how much the business would like to contribute monthly to employees’ healthcare. With a tax-free reimbursement plan the business only reimburses employees for what they spend.

3. Set Up the Formal Reimbursement Plan

Most small businesses work with a health reimbursement software provider, or other third-party, to set up and help administer the plan. Working with a third party helps ensure compliance and makes administration of reimbursements easy.

4. Educate Employees

Lastly, take time to educate employees about how the tax-free benefit works for them and their families.

Related: How to Educate Employees About Individual Health Insurance Reimbursement

Conclusion

Is there a way to help employees with health insurance tax-free? Yes. Using a formal, compliant reimbursement plan, such as an HRP, allows reimbursements to be tax-free to employees and tax-deductible to the employer.

What questions do you have about tax-free health insurance reimbursement? Leave a comment below and we’ll help answer them.

The Comprehensive Guide to the Small Business HRA

Learn how an HRA works for employers in our latest webinar
Watch the recording today, and learn how an HRA can help your organization.
WATCH THE WEBINAR
meeting_wide-1 CTA_purp_R