The Proper Way For Employers To Reimburse Employees’ Individual Health Insurance
Employers are allowed to use a Health Reimbursment Arrangements (HRAs) to reimburse employees, tax free, for individual health insurance premiums, similar to the way employers contribute on a tax free basis to group premiums. This has been clarified with the release of numerous U.S. Treasury and State publications spelling out how employers can use HRAs for tax-free reimbursement of the premiums paid for personal health insurance policies. See “Insurance Premiums” in IRS Publication 502and IRS Publication 969.
Specific HIPAA and ERISA regulations govern the distribution of individual health insurance plans at the workplace– restricting employer involvement with the sale or administration of those policies. The administrative platform used must ensure employer compliance with these regulations.
Today, in 2013, less than 50% of small employers offer any employee health benefits. Every year, 2 million fewer employees will receive group health insurance coverage because of rising cost.
Health Reimbursement Arrangements
A Health Reimbursement Arrangement, or HRA, is a type of Medical Expense Reimbursement Plan that allows the employer to use tax-free dollars to reimburse designated employees for out-of-pocket medical expenses (including insurance premiums and deductibles). Eligible medical expenses are approved and reimbursed either by the employer or a third party administrator that the employer designates.
Advantages of HRAs
- Employees are not taxed on the value of their HRA coverage or on reimbursements they receive from the HRA.
- An HRA is only funded as reimburesements are recorded.
- HRAs may allow unused funds to be carried over to subsequent years.
- HRAs are not subject to HSA rules thus allowing greater flexibility in the plan design of the high deductible health plan.
Some Types of HRAs
INTEGRATED HRAs: an HRA that is integrated with a high deductible major medical plan, whereby the HRA is offered only to those who take the major medical coverage.
STAND-ALONE HRAs: an HRA that is not linked to a major medical plan and has separate eligibility rules.