More and more, small businesses are setting up programs to reimburse employees for personal health insurance expenses, instead of contributing to a group health insurance plan.
Personal health insurance reimbursement is gaining popularity among small businesses because:
Small businesses want to offer health benefits, but traditional group health insurance costs are unaffordable. Barely half of small businesses offer traditional health insurance, with the number one reason they don't being cost.
Personal health insurance is better for employees because it offers choice and portability. And, personal health insurance policies are now guaranteed-issue.
Compared with group health insurance, personal health insurance policies cost less.
Two Core Options for Personal Health Insurance Reimbursement
As a small business considers reimbursing employees' personal health insurance, there are two main ways to approach a formalized reimbursement program.
Taxable Health Care Allowance - With this approach, the small business reimburses employees for their substantiated personal health insurance costs on a post-tax basis up to a healthcare allowance specified by the company.
Tax-free Health Reimbursement Plan (HRP) - With this approach, an employer utilizes Section 105 of the Internal Revenue Code to establish a formal self-insured 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). This type of plan must be designed to comply with the Affordable Care Act's Market Reforms.
Some businesses also consider simply giving employees taxable raises or bonuses with the hope that employees will use it on healthcare. However, this usually causes more headaches than it's worth. See: 4 Pitfalls of Increasing Wages for Health Insurance.
Tips for Personal Health Insurance Reimbursement
Here are five quick tips about reimbursing employees' personal health insurance:
Use a Reimbursement Software (such as a Defined Contribution or Section 105 Provider) to set up a compliant plan, and to make administration easy.
Work with a health insurance broker or agent to help employees select plans.
Understand the compliance requirements with the IRS, ERISA, HIPAA, and ACA. To make compliance easy, work with software provider who will help the business understand and ensure compliance.
- Take the time to educate employees about the reimbursement program, and about the advantages of personal health insurance.
Don't get involved with the selection or purchase of employees' personal health insurance.
What questions do you have about reimbursing employees for their personal health insurance expenses? Leave a comment below.