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Small Business Employee Benefits and HR Blog

How to Set Up a Premium Reimbursement Program

Premium Reimbursement Programs are gaining popularity with small and medium-sized businesses because they offer a more affordable way to offer health benefits. By reimbursing employees for individual health insurance premiums, instead of contributing to a group health insurance plan, the business saves 20% to 60% on healthcare costs. 

What is premium reimbursement, why is individual health insurance better, and how do you set up a reimbursement plan? Read on.
Premium Reimbursement Program

This blog post is an excerpt from our eBook "The Step-by-Step Guide to Premium Reimbursement". Download the eBook here.

What is Premium Reimbursement?

The concept is simple. The business offers employees a monthly healthcare allowance to use on individual health insurance – instead of contributing to a group health insurance plan.

Employees purchase their own health plan, and are reimbursed up to the amount available in their balance.

Why Individual Health Insurance?

On average, individual health insurance premiums cost up to 60% less than group health insurance premiums. (See this State by State Comparison.) And, individual health insurance is better for employees because of greater choice, portability, and premium tax credits.

How to Set Up a Premium Reimbursement Program

There are three simple steps to set up a Premium Reimbursement Program.

Step 1: Cancel Group Health Insurance

First, cancel the group health insurance plan (if one is offered). Most plans can be canceled at any time. When a plan is canceled, all those covered will be eligible for a special enrollment period for individual health insurance. This means they’re eligible to purchase individual health insurance outside of the annual open enrollment period (ex: November 15, 2014 to February 15, 2015).

Eligible employees will also be able to access premium tax credits. Read more about how to cancel a group health insurance plan.

Step 2: Set Up a Formal Reimbursement Plan

To set up a formal reimbursement plan, first decide how much the business will contribute to employees’ health insurance expenses. Businesses can provide the same contribution amount (“allowance”) to all employees, or offer a different allowance amount by class of employee and/or family status.

Then, work with a Reimbursement Software Provider to set up a formal plan. You’ll have two options:

  1. Taxable Health Care Allowance - With this approach, you’ll reimburse employees for their substantiated personal health insurance costs on a post-tax basis.

  2. Tax-free Healthcare Reimbursement Plan (HRP) - With this approach, the business uses a Section 105 Medical Reimbursement Plan to reimburse employees for their substantiated individual health insurance costs on a pre-tax basis. This type of plan is sometimes called a Healthcare Reimbursement Plan (HRP), and must be designed to comply with the Affordable Care Act's Market Reforms.

Lastly, employees purchase individual health insurance policies with their own money and submit a reimbursement request. The business reimburses employees on payroll.

With premium reimbursement, the business only reimburses employees for eligible premium expenses, up to the amount of their healthcare allowance. Without annual renewal increases or minimum contribution amounts, the business is free to set and control all costs.

Step 3: Educate Employees

The last step is to educate employees about how individual health insurance and premium reimbursement works, and how it benefits employees and their families. Educate employees about:

  • How the reimbursement program works
  • Why the business has decided to offer health benefits in this way (remember, it is better for
    them too!)
  • The benefits of individual health insurance such as plan choice, flexibility, and cost-savings
  • How to purchase individual health insurance for themselves and their family
  • How to request reimbursement for their premium expenses

What questions do you have about setting up a Premium Reimbursement Program, or reimbursing employees for individual health insurance?