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Small Business Employee Benefits and HR Blog

An Overview of Premium Reimbursement Arrangements

December 5, 2014
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Premium Reimbursement Arrangements 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. An Overview of Premium Reimbursement Arrangements

This article provides an overview of Premium Reimbursement Arrangements.

An Overview

A Premium Reimbursement Arrangement is simply an arrangement for an employer to reimburse employees for their individual health insurance premium expenses.

With a formalized arrangement, all similarly situated employees are granted a fixed allowance amount to purchase individual health insurance, but only receive money if they actually purchase health insurance.

Employees purchase their own individual health insurance policy and submit proof to their employer (or the employer's third-party provider). Employees receive monthly reimbursements up to their allowance amount that are typically added to their paycheck tax-free (optional).

Note: The term Premium Reimbursement Arrangement generally refers to a formalized arrangement (as described above), compared to a health insurance stipend. With a health insurance stipend, employees are provided a taxable stipend to purchase individual health insurance, and do not show proof as to whether or not they actually purchase health insurance.

Why Individual Health Insurance?

This type of health insurance alternative is taking off because individual health insurance is now better, and less expensive, than group health insurance.

On average, individual health insurance premiums cost up to 60% less than group health insurance premiums. (See this State by State Comparison.) 

With individual health insurance, employees get to: 

  1. Pick the plan that best fits their needs, including the doctors, for about half the cost of an equivalent group plan.

  2. Keep their individual health insurance policy for as long as they want, completely independent of employment.

  3. Receive a federal subsidy for, on average, about half the cost of the premium -- if you are a family earning less than $100,000 per year or a single person earning less than $45,000 per year.

Read more about individual health insurance here.

How Do We Administer a Premium Reimbursement Arrangement?

Formal Premium Reimbursement Arrangements are group health plans. As such, they are subject to compliance with IRS, ERISA, HIPAA, ACA, and other applicable rules. This includes not getting involved with the selection or purchase of employees' individual health insurance policies.

To make sure your arrangement is compliant, and to make compliance easy, use a Reimbursement Software Provider. A good software provider will have a paperless plan setup, seamless payroll integration, online reimbursement request submission, fast claim processing, and real-time notification through every step of the reimbursement process.

What questions do you have about Premium Reimbursement Arrangements, or about reimbursing employees for individual health insurance? Leave a comment below.


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