Reimbursing Health Insurance Premiums? You'll Need an HRA

Reimbursing employees for health insurance premiums is an attractive alternative to offering traditional group coverage, especially for small businesses. But while helping employees pay for insurance is possible, it isn’t as simple as giving your employees extra cash or adding a stipend to your benefits package. Despite what you may think, the federal government has rules regulating how premium reimbursements can work.

This article will explain when employers can legally reimburse their employees’ health insurance premiums, and how stand-alone health reimbursement arrangements (HRAs) can make it possible for you to do so compliantly.

In this blog post, you’ll learn:

• When employers can legally reimburse employees for health insurance premiums.
  
• Which premium reimbursement methods the federal government prohibit and why.
  
• How stand-alone HRAs work for reimbursing premiums, and how they help employers stay compliant with IRS and Affordable Care Act (ACA) rules.

Can employers legally reimburse their employees’ health insurance premiums?

Yes, business owners can legally reimburse their staff for their premiums. But only if the employer uses a compliant health benefit to do so. In most cases, employers can’t pay or reimburse employees for individual health insurance premiums directly. Without a formal plan, employers, especially applicable large employers (ALEs), may violate federal rules under the Affordable Care Act (ACA) and IRS guidance. For ALEs, this includes Internal Revenue Code § 4980H¹.

The 21st Century Cures Act of 2016 gave small employers a legal way to reimburse employees for their health insurance premiums through an HRA², with HRAs also becoming available to large employers in 2020 through separate federal regulations.

HRAs are employer-funded health benefits that allow employees to receive tax-free reimbursements for qualified medical care expenses, including individual health insurance premiums, as long as you design and administer the benefit correctly.

What are the improper ways to reimburse employees’ health insurance premiums?

Many reimbursement methods are illegal under federal law as they don’t meet ACA requirements. According to IRS Notice 2013-54, the government prohibits employers from using cash or pre-tax funds to specifically reimburse employees for individual health plan premiums³. According to guidelines, these arrangements are employer payment plans that don’t comply with ACA market reforms.

Here are a few other examples of illegal premium reimbursement methods:

1. Premium stipends or allowances. Providing employees with a monthly or annual stipend specifically intended to cover health insurance premiums, even if you label it as a “health allowance,” isn’t compliant. This includes taxable and non-taxable stipends meant to purchase individual coverage.
   
1. Small businesses not subject to the employer mandate can offer a general health stipend that can be used for any expense. However, if they do so, they can’t require any substantiation of health coverage. Only reimbursing premiums through a stipend program or requiring substantiation of coverage may create a self-funded group plan that violates the ACA.
2. Bonuses or salary increases. Increasing an employee’s pay or offering a bonus only if they agree to purchase health insurance is also an improper workaround. This approach can trigger additional ACA penalties for ALEs, in addition to noncompliance penalties.
   
   
3. Direct premium payments outside an HRA. Paying an insurance carrier directly for an employee’s individual policy without using an HRA is another example of an EPP. If you do so, you may be subject to Employee Retirement Income Security Act (ERISA) and ACA penalties.

These options may seem simpler than setting up and administering an HRA. However, they can expose you to costly tax penalties.

How employers can leverage a stand-alone HRA to reimburse their employees’ health insurance premiums legally

Unlike informal reimbursement methods, a stand-alone HRA gives employers a compliant way to help employees pay for individual health insurance premiums on a tax-free basis. With a stand-alone HRA, employers decide how much to offer by setting a defined monthly allowance. Employees then use that allowance to pay for out-of-pocket medical expenses, including qualifying health insurance premiums.

After employees incur an eligible expense, they must submit required claim documentation — such as a bill, receipt, proof of coverage, or explanation of benefits (EOB) — to fulfill substantiation requirements. Employers (or your HRA administrator) review the documentation and, if approved, reimburse the employee tax-free up to their available allowance. HRA reimbursements are tax-deductible for employers and exempt from payroll taxes. They’re also free from income taxes for employees.

The following are two stand-alone HRAs that allow for premium reimbursement:

• Qualified small employer HRA (QSEHRA): Designed for small businesses with fewer than 50 full-time equivalent employees (FTEs), a QSEHRA allows employers to reimburse employees for individual health insurance premiums and other eligible medical care expenses up to an annual IRS-defined maximum limit. Participating employees must have a health plan with minimum essential coverage (MEC) to use the benefit.
• Individual coverage HRA (ICHRA): An ICHRA is available to employers of any size and doesn’t have minimum or maximum contribution limits. Employers can customize allowance amounts compliantly by employee classes, family status, or age. Those who opt in to the ICHRA must enroll in qualifying individual health coverage to receive reimbursements.
• ALEs can use the ICHRA to satisfy the ACA’s employer mandate requirements, provided their allowances meet affordability standards.

After choosing either the QSEHRA or ICHRA, you must design your benefit in accordance with federal regulations. This includes creating legal plan documents, a summary plan description, and providing required employee notices at least 90 days before the start of the plan year.

During plan design, employers also decide whether their HRA will reimburse premiums only or premiums plus other eligible out-of-pocket medical expenses.

Stand-alone HRAs can reimburse a wide range of insurance premiums, including:

• Individual health insurance premiums, such as plans purchased through the federal Health Insurance Marketplace, state-based marketplaces, and private exchanges, as long as the coverage provides MEC.
• Ancillary insurance premiums, such as dental and vision plans
• TRICARE premiums
• Medicare premiums
• Keep in mind that employees must follow specific coordination rules when combining Medicare with an HRA.
• CHIP premiums
• Long-term care insurance premiums
• COBRA premiums
• Short-term health plan premiums

Keep in mind that while an HRA can reimburse employees for these premiums, not every type of coverage makes the employee eligible to participate in the benefit. For example, an HRA can reimburse for short-term health plans, but it isn’t qualifying coverage for an employee to participate in the QSEHRA or ICHRA.

To reimburse insurance premiums compliantly, you must verify that employees have qualifying health coverage. Verification is necessary for premium reimbursement and helps ensure your HRA remains ACA- and IRS-compliant. Additionally, employees must regularly attest that they still have coverage throughout the plan year.

Can an employer reimburse their employees’ health insurance premiums if they have a group health plan?

IRS rules typically don’t allow employers to reimburse employees for their health insurance premiums when they have a traditional group health plan. This is the case even if the employer offers a group coverage HRA (GCHRA) that integrates with that policy.

The reason for this is that employees typically pay for their portion of an employer-sponsored group health plan through pre-tax payroll deductions. Because HRAs also provide tax-free reimbursements, reimbursing those same premiums through an HRA would result in a “double-dip” tax advantage, which the IRS doesn’t allow⁴.

However, a QSEHRA can reimburse an employee’s spouse with group coverage for their share of the premium if the premium isn’t paid pre-tax and the employer enables this feature during plan design.

Conclusion

Helping employees pay for health insurance premiums is a good way to provide them with financial stability and boost workplace morale, but you must do it correctly. Informal reimbursement methods are prohibited and can expose you to unnecessary risk and penalties. Instead, stand-alone HRAs provide a compliant, tax-advantaged way to reimburse premiums while meeting federal regulations.

PeopleKeep by Remodel Health makes it easy for small employers to set up and manage stand-alone HRAs. Whether it’s plan design, document review, or attestation, we help ensure your benefit stays compliant through the plan year. Contact us to learn how we can help you reimburse health insurance premiums the right way.

This article was originally published on May 12, 2014. It was last updated on February 9, 2026.

References

1. 26 U.S. Code § 4980H - Shared responsibility for employers regarding health coverage

2. H.R.34 - 21st Century Cures Act

3. IRS Notice 2013-54

4. IRS Memo - Employer Payment of Employee Health Insurance Coverage Provided Under a Spouse's Group Health Plan