Introduction

Today, fewer than 50% of small businesses offer employees health insurance, largely because of the cost.
That's over 2.3 million small businesses that don't offer health insurance.

However, most want to offer health benefits to recruit and retain top employees, which is why small businesses
are thinking outside the box and evaluating individual health insurance.

On average, individual health insurance costs up to 60 percent less than group health insurance for the same or better coverage.

Additionally, individual health insurance is better for employees because of greater choice, portability, guaranteed-issue coverage, and additional cost savings with the premium tax credits.

All of these factors leave small business owners asking "Can I reimburse employees for individual health insurance?" And, “Can we do this tax-free?” The answer to both of these questions is yes.

This “101” guide outlines how employers can reimburse employees for individual health insurance tax-free, while keeping the business and employees in compliance.

How to Reimburse Employees for Individual Health Insurance Tax-Free

Step 1: Employer Sets up a Formal Reimbursement Plan

The first step is for the employer to set up a self-insured medical reimbursement plan, also called a Healthcare Reimbursement Plan (HRP) or Section 105 Medical Reimbursement Plan. To comply with all applicable rules and regulations (discussed next), the reimbursement plan is structured to reimburse employees for:

Health insurance premiums up to a specified monthly healthcare allowance, and
Basic preventive health services without cost-sharing.

When the employer sets up the reimbursement plan, they determine monthly healthcare allowances and define which employees are eligible for the plan.

Step 2: Employees Purchase a Health Insurance Plan
Each employee purchases an individual or family health insurance plan with their own money.

Step 3: Employer Reimburses Employees
Employees request reimbursement from the reimbursement plan. Once the premium expense is substantiated, the employer reimburses employees tax-free.

DROP THE GROUP

Serviced by:

Compliance 101: How to Reimburse Employees for Individual Health Insurance The Right Way

REQUEST A FREE CONSULTATION

Defined Contribution: Drop Group Employer Coverage and Switch to Individual Health Insurance

Conclusion

The best way to offer an employee health benefit is to reimburse employees for individual health insurance. Employees pick the plan that best fits their needs, including the doctor, keep the plan for as long as they want, and save money.

As employers set up self-insured medical reimbursement plans to reimburse individual health insurance tax-free, there are important federal regulations to understand and comply with.

Failure to comply with these regulations can lead to costly fines.

By using a quality premium reimbursement software provider, employers can administer a compliant reimbursement plan in less than 5 minutes per month.

COMPLIANCE 101

When it comes to self-insured medical reimbursement plans, there are three key compliance considerations:

A self-insured medical reimbursement plan is a group health plan.
A self-insured medical reimbursement plan is a tax-free benefit as outlined in IRS Code.
All group health plans, including self-insured medical reimbursement plans, must comply with applicable federal rules including IRS, HIPAA, COBRA, ERISA, and the ACA.

1) A Self-Insured Medical Reimbursement Plan is a Group Health Plan
What is a group health plan? A group health plan is defined as an employee welfare benefit plan established or maintained by an employer or by an employee organization (such as a union), or both, that provides medical care for participants or their dependents directly or through insurance, reimbursement, or otherwise.

Why is this important? Group health plans must follow applicable IRS, HIPAA, COBRA, ERISA, and ACA rules. The specifics of these rules are discussed on pages 6-8.

2) A Self-Insured Medical Reimbursement Plan is a Tax-Free Employee Benefit
Self-insured medical reimbursement plans are a tax-free employee benefit as outlined in Internal Revenue Section 105.

For employers, this means reimbursements are tax-deductible as a business expense, the same way as premiums paid for a group insurance policy or other benefits expenses.

For employees, reimbursements are not included in employees’ income and thus not subject to any income or payroll tax withholding. However, the tax-free nature of reimbursements received by proprietors, partners, and some S-Corp shareholders may be limited.

Key Sections of the Internal Revenue Codes for Tax-Preferred Premium Reimbursement

IRC Section 105: Section 105 allows tax-free reimbursements from a self-insured medical reimbursement plan if the reimbursements are for expenses incurred for “medical care” as defined in Section 213(d).
IRC Section 213: Section 213(d) defines “medical care” for personal deduction and Section 105 distributions, which includes amounts paid for insurance.
IRC Section 106: Section 106 allows the value of the self-insured medical reimbursement plan to be tax-free to employees.
IRC Section 162: Section 162 allows reimbursements to be tax-deductible to the employer as a business expense.