Employees have coverage from the Individual Health Insurance Marketplace and your small business wants to help with the cost. One solution is to set up a health insurance reimbursement plan. But wait. Can an employer really reimburse employees for their Marketplace health plans? The answer might surprise you.
This article answers common questions about how employers can reimburse employees’ Marketplace health plans.
How Can We Reimburse Employees’ Marketplace Health Plans?
There are two approaches an employer can take to help employees with their Marketplace health plans and other individually-purchased health insurance.
The first approach is to adopt a Section 105 Health Reimbursement Plan. This is a formal, tax-advantaged health plan that allows for reimbursement of individual health insurance plans. Under current rules and tax code, a Section 105 Health Reimbursement Plan may reimburse individual health insurance, including the non-subsidized portion of Marketplace health plans.
The second approach is to offer employees a stipend (bonus or raise) to use on health insurance, but this must be treated as taxable income.
It is important to note that with health reform there are new rules for helping employees with individual health insurance. These two ways follow the new rules. In other words, use one of these two approaches to avoid costly penalties.
This article focuses on a formal Health Reimbursement Plan, as most small businesses take this approach because of the obvious tax and cost savings.
Can We Reimburse Employees Who Are Getting Premium Tax Credits?
Yes. As mentioned previously, employees may use their Health Reimbursement Plan to be reimbursed for the non-subsidized portion of their health insurance premium. Non-subsidized means the premium cost minus any premium tax credits.
Example. Employee “Sally” is 21 years old, single, and earns $25,000/year. Sally purchases a Silver health plan from the Marketplace. The premium is $216 /month before premium tax credits. Based on her income and family status, Sally is eligible for a premium tax credit of $73/month. This means Sally is responsible for paying $143/month ($216 minus $73) for her coverage.
Additionally, Sally’s employer offers a Health Reimbursement Plan allowance of $150/month. Using the reimbursement plan, Sally is reimbursed $143 each month for her premium expense, bringing her out-of-pocket expense down to $0.
What if an Employee’s Premium Tax Credit Changes?
If an employee’s household income changes over the course of the year, and their advanced premium tax credit is adjusted at tax time, they can use the Health Reimbursement Plan to be reimbursed for additional premiums they pay out-of-pocket.
What Other Types of Health Plans Can We Reimburse?
Employees may use their Health Reimbursement Plan on the following types of health insurance premiums, provided they were not already paid with pre-tax dollars:
Major medical individual health insurance premiums
Limited benefit individual health insurance premiums
Dental care and vision care premiums
Qualified ancillary premiums (e.g. accident policies)
Medicare Part A or B, Medicare HMO, and employer-sponsored health insurance premiums
Medicare Advantage and Supplement premiums
Long-term care premiums
How Do You Set Up a Health Reimbursement Plan?
To offer a Health Reimbursement Plan, follow these three simple steps:
Step 1: Determine the Budget
As a first step, determine how much the company would like to contribute to employees’ healthcare allowances. The company can either provide the same amount to all employees, or offer different amounts by class of employee or family status.
Step 2: Set up a Health Reimbursement Plan
Next, set up the reimbursement plan. As part of the plan setup, the company determines monthly allowances and eligibility criteria. Though it may sound easy to self-administer the plan, experts recommend utilizing Health Reimbursement Software for this step. Why? Health Reimbursement Software ensures compliance with the various rules and regulations, and makes administration quick and easy.
Step 3: Reimburse Employees on Payroll
Employees submit their health insurance expenses. Once reviewed (usually by a third party) and approved, the business reimburses employees on payroll.
A Health Reimbursement Plan (HRP) is a tool employers may use to reimburse employees for their Marketplace health plans. When traditional health insurance isn’t an option, an HRP offers small businesses a way to help employees with their individual health insurance premiums - including health plans purchased through the Health Insurance Marketplaces.
Do you have questions about how reimburse employees for their Marketplace health plans? Leave a comment below and we’ll help answer them.