Business owners and employers convey more options than ever before when it comes to offering health insurance to their employees. If you have heard of health insurance reimbursement, you might be wondering, “Are insurance reimbursements taxable?”
In the past, the IRS typically treated reimbursements as income and insisted the employer pay payroll taxes and also the employees recognize tax. Now, however, there are two health reimbursement arrangements that make it possible to reimburse employees for medical health insurance premiums and qualified medical expenses tax-free. Let's look at those.
Using HRAs for insurance reimbursement
Sometimes referred to as “401(K)-style” insurance, two recently created HRAs allow an employer to reimburse for medical expenses and/or insurance costs on a tax-free basis. Under these arrangements, employees purchase their insurance on the open market and then submit states their employer to get reimbursed for the price of their premium and if allowed, all qualified medical expenses.
- The qualified small employer HRA (QSEHRA) requires your company to become small, with under 50 Full-time Equivalent employees, and also you can’t provide a group plan at the same time. If you meet those qualifications, you can use an HRA administration tool (like ours!) to produce your QSEHRA, choose how much you'll reimburse every month (up to the contribution limits), let your employees choose the plan that works best for them, and reimburse them when they submit receipts!
- The individual coverage HRA (ICHRA) is almost like a “super-charged” version of the QSEHRA. Rather than being limited to 50 employees, employers of any size can set up an ICHRA for their teams. There are also no contribution limits with this particular HRA. Another key differentiator from HRAs previously? ICHRA allows business owners to customize their reimbursements across different classes of employees. While everyone must be treated fairly within a certain class, reimbursement rates can vary between full-time, part time, seasonal, remote, etc.
How insurance reimbursement works
The mechanics of an HRA are surprisingly simple. At a high-level, employees purchase their expenses and employers reimburse them. Here's more information on how you can reimburse for medical health insurance.
- Employers design their plan and set reimbursement allowances
- Employees purchase their insurance and medical bills
- Employees provide evidence of their expenses
- Employers reimburse the worker up to the set limit
What are you able to reimburse?
- Reimburse Insurance costs Only: Employers can limit reimbursements to only go towards eligible premium expenses. Typically, this describes individual medical health insurance premiums but tend to likewise incorporate eligible dental premiums, vision premiums, etc. so long as the worker has Minimum Essential Coverage (MEC) for QSEHRA or a qualified health arrange for ICHRA.
- Reimburse Insurance Premiums and Medical Expenses: Most employers choose to allow medical expenses to become reimbursed too. Note: Employers can choose to exclude categories of expenses (i.e., “prescriptions”) so long as the exclusion is applied fairly to everyone. Here is a comprehensive listing of medical expenses that qualify!
TCH can sort out insurance reimbursements
Take Command's small business tax strategy HRA guide can help direct you towards the best arrangement for the business. We've also compiled answers to probably the most common HRA questions from employees. We're ready to chat on our website if you have any specific questions regarding your business and how HRAs could help.
