Employers have many options for offering health insurance to employees. However, price is often the deciding factor when businesses choose health insurance benefits for their employees.
Employers understand that health insurance benefits can attract and retain top talent and boost employee satisfaction. However, not every business can offer fully sponsored health insurance, and employees must often foot a significant portion of the bill. In these cases, the employer may want to offset some of their employees’ expenses.
Fortunately, reimbursement options exist, but it’s crucial to handle health expense reimbursement correctly and abide by applicable legal requirements. We’ll explain what employers need to do to reimburse team members for health insurance costs.
Did you know? Business health insurance requirements state that companies with 50 or more full-time employees must provide group health insurance coverage to their employees.
Employers can help with employees’ health insurance expenses in several ways. However, if you don’t use a pretax shelter provided by the IRS, such as a health reimbursement arrangement (HRA), there could be significant tax consequences.
An HRA is an employer-funded and -owned group health plan that allows employees to be reimbursed, tax-free, for some medical expenses. There is a cap on how much employees can be reimbursed annually. Any money not used during a plan year can be rolled over to the following year.
There are a few types of HRAs, including:
Employers may choose to offer HRAs over group small business health insurance for the following reasons:
As explained above, a QSEHRA is a specific HRA type designed to help smaller businesses offset some of their employees’ healthcare costs by providing nontaxed reimbursement of some healthcare expenses, including premium and coinsurance payments.
To be eligible for a QSEHRA:
The maximum QSEHRA benefits or contributions in 2022 were $5,450 ($454.17 monthly) for employee-only coverage and $11,050 ($920.83 monthly) for employee and household coverage. Understanding the caps for each employee in the program you offer is essential, as it relates to an employee’s growing burden in absorbing annually increasing healthcare costs.
Your HRA structure determines how you reimburse employees for health costs.
Within a QSEHRA, the business can select a monthly benefit cap or tax-free money allowance for each employee. Note that all full-time employees must receive the same allowance amount.
Employees obtaining care will directly pay their health care provider or insurance company. Afterward, they’ll submit proof of payment to their employers, and the employer will use QSEHRA funds to reimburse them. Reimbursement is tax-free.
With a group-affiliated HRA, employers select a monthly benefit allowance of tax-free money to offer each enrolled employee. Employees then purchase what they need throughout the month, saving their receipts for the employer to review. Once the review process is complete and the expense is approved, the employer reimburses the employee up to the monthly cap they’ve set.
Employers execute a standard HRA the same way they would a GCHRA. Each employee has a set amount of pretax money each month and submits receipts for qualifying expenses. Also, there are no IRS-regulated contribution caps on standard HRAs, so the employee can be reimbursed for any qualifying expense the IRS lists.
With an ICHRA, employers can reimburse employees tax-free for health insurance purchased on the open market. Employers can opt to cover only premiums or also reimburse for other qualifying medical expenses. With an ICHRA, the employer can essentially provide health insurance benefits without maintaining a conventional group health insurance plan.
After the employee incurs reimbursable expenses, they’ll submit specific invoices, receipts or benefits explanations detailing:
The employer or ICHRA manager will examine the expenses to ensure they’re covered and reimburse the employee via payroll, check or transfer.
An excepted benefit HRA allows employers of any size to use pretax dollars to reimburse specific benefits. Employers can establish a reimbursement limit of up to $1,800 (this will rise to $1,950 in 2023). Carryover amounts are not counted in the annual limits, and employers may not offer an EBHRA and an ICHRA to the same employee.
The employee will pay for qualifying medical expenses out of pocket and then submit a claim for reimbursement with the employer.
While the ACA doesn’t directly govern HRAs, you must follow Employee Retirement Income Security Act of 1974 (ERISA), IRS and other regulations to remain compliant. Ensure the following items are in order in your HRA:
Employers should consider the pros and cons of establishing an HRA for their employees to ensure they make the best decision for their organization.
The pros of an HRA include the following:
The cons of the HRA include the following:
When employers add an HRA to their employee benefits package to help with healthcare expenses, they show how valuable their team is to the organization’s bottom line. HRAs are low-risk, budget-friendly options for small businesses that want to do right by their employees and keep excellent team members for the long term.
Kimberlee Leonard contributed to the reporting and writing in this article.