Medical Insurance Reimbursement Plans are gaining popularity with small and medium-sized businesses as a more affordable option for offering healthcare benefits. Employers can save 20 to 60 percent on healthcare costs by reimbursing employees for medical insurance premiums rather than contributing to a group health insurance plan.
This article contains information on how to set up a Medical Insurance Reimbursement Plan and the different options for Medical Insurance Reimbursement Plans.
What Are Medical Insurance Reimbursement Plans?
Medical Insurance Reimbursement Plans are a health benefits arrangement where employers offer a monthly healthcare allowance for employees. Employees purchase an individual health insurance policy that fits their financial and personal needs. The employer reimburses the employees up to the amount available in their allowance balance.
How Do Small Businesses Set Up a Medical Insurance Reimbursement Plan?
There are three simple steps to set up a Medical Insurance Reimbursement Program:
Step 1: Cancel Group Health Insurance
Most plans can be cancelled at any time, and when an existing group plan is cancelled, employees will qualify for a special enrollment period (outside of open enrollment) to enroll in an individual health insurance policy.
Step 2: Set Up a Formal Reimbursement Program
Small businesses can set up a formal reimbursement program by allotting pre-determined allowance amounts to their employees. The employer may either give everyone the same allowance amount, or offer a different allowance amount by employee class and/or family status. To ensure compliance with federal regulations regarding medical insurance reimbursements, employers should work with a reimbursement software provider.
See below for the different ways to set up a Medical Insurance Reimbursement Plan.
Step 3: Educate Employees
Step three is to educate employees about their options with individual health insurance and how Medical Insurance Reimbursement Plans work.
What Are the Advantages of Medical Insurance Reimbursement Plans?
There are many advantages of Medical Insurance Reimbursement Plans, including:
Lower Cost: by reimbursing employees for individual health insurance premiums, rather than purchasing a group plan, small businesses can save 20 to 60 percent on healthcare costs.
Choice: employees can choose the plan that best fits their personal, financial, and healthcare needs.
Portability: employees can take their plans with them if they decide to leave the company.
What Are the Different Options for Medical Insurance Reimbursement Plans?
There are three primary approaches to Medical Insurance Reimbursement Plans for small businesses to consider:
1. Taxable Monthly Stipend
The first option is a taxable stipend, with the intention that employees will use the extra funds on purchasing healthcare.
While this may seem like a beneficial arrangement for both parties, there are a few problems with this solution. There is no guarantee that the employees will actually spend the money on health insurance with a stipend. Additionally, many employers will lose their desired, top job candidates to employers with formal health benefits in place. Most candidates prefer a formal, tax-advantaged health benefits program.
2. Taxable Medical Insurance Allowance
The second option is to offer a taxable healthcare allowance. With this approach, the employer reimburses employees, up to a specified allowance, for their substantiated medical insurance premium costs on a post-tax basis. The employer ensures that the employees are using the allowances on health insurance by offering a taxable contribution.
The lack of tax advantage is one major constraint with this approach. Since employees have to pay taxes on the reimbursements, most employees prefer their employers to establish an arrangement providing tax-free reimbursements of medical insurance costs.
This type of arrangement is possible under Section 105 of the Internal Revenue Code (IRC). Employers are able to establish a formal, self-insured medical reimbursement plan to reimburse their employees for their individual health insurance premiums on a tax-free basis.
3. Tax-Free Medical Insurance Reimbursement Plan
This option is a tax-free healthcare allowance, as opposed to a taxable healthcare allowance. With this approach to medical insurance reimbursement, the employer can implement a formal, self-insured medical reimbursement plan under Section 105 of the IRC. This type of plan allows employers to reimburse their employees tax-free for their substantiated medical insurance premiums.
This type of arrangement is also referred to as a Healthcare Reimbursement Plan; it should not be confused with an employer payment plan, allowed under Section 106 of the IRC. It is vital for employers to ensure compliance with federal regulations when providing tax-free reimbursements for individual health insurance premiums through the premium reimbursement plans.
Other Names for Medical Insurance Reimbursement Plans
This approach for reimbursing employees for medical insurance goes by several names, including:
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