How Employers Can Reimburse Employees for Health Insurance

Offering health benefits doesn't have to mean managing a traditional group plan. Employers across the country are turning to health insurance reimbursement as a flexible, cost-effective alternative. The key is doing it the right way to stay compliant and avoid hefty IRS penalties.

Employee health insurance reimbursement allows businesses to support their workforce without the administrative burden of selecting and managing group coverage. With the right structure in place, these reimbursements can be completely tax-free for both the employer and employee.

Can an Employer Reimburse an Employee for Health Insurance?

Yes, employers can reimburse employees for health insurance, but only through specific IRS-approved arrangements. Reimbursing employees outside of a compliant structure can trigger significant penalties.

According to the IRS guidance on employer health care arrangements, employers who reimburse or pay any portion of individual health coverage premiums outside of a compliant Health Reimbursement Arrangement face a $100 per day excise tax per applicable employee. That adds up to $36,500 per year for each affected worker under section 4980D of the Internal Revenue Code.

The good news? Several compliant options exist that make it straightforward to reimburse employees for health insurance on a tax-advantaged basis.

Health Reimbursement Arrangement Options

Health Reimbursement Arrangements are employer-funded accounts that reimburse employees for qualified medical expenses, including individual health insurance premiums. Unlike Health Savings Accounts, HRAs are owned and funded entirely by the employer.

Individual Coverage HRA (ICHRA)

The Individual Coverage HRA represents the most flexible option for employers of any size. With an ICHRA, businesses can reimburse employees tax-free for individual health insurance premiums and other qualified medical expenses.

ICHRA offers no minimum or maximum contribution limits, allowing employers to divide employees into classes and offer different allowance amounts. It works for businesses of any size, from startups to enterprise organizations. Employees choose their own health plans on the individual market, and contributions are tax-deductible for employers and tax-free for employees.

ICHRA gives employees control over their healthcare decisions while employers maintain predictable costs. The employer experience becomes simpler when you set a budget and let employees select coverage that fits their needs.

Qualified Small Employer HRA (QSEHRA)

Small businesses with fewer than 50 full-time equivalent employees who don't offer group health plans can use a QSEHRA. This option works well for SMB organizations that want to provide health benefits without the complexity of group insurance. Employees purchase their own individual coverage and submit receipts for tax-free reimbursement.

Excepted Benefit HRA (EBHRA)

The EBHRA covers specific benefits like COBRA continuation coverage, short-term limited duration insurance, and long-term care. Employers can offer an EBHRA alongside a traditional group health plan to help employees cover additional out-of-pocket costs.

Health Insurance Reimbursement Rules to Follow

Following IRS guidelines protects your business from penalties and ensures your employees receive tax-free benefits. The core health insurance reimbursement rules are straightforward once you understand the requirements.

Employers must fund the HRA entirely with employer contributions and reimburse only eligible medical expenses. Maintaining proper documentation for all reimbursements is essential, along with providing written notice to employees about their HRA terms. Following substantiation requirements before issuing reimbursements keeps your arrangement compliant.

Employees must maintain qualifying individual health coverage to participate in an ICHRA. The employee experience improves when workers understand how to select coverage and submit claims correctly.

Health Stipends as an Alternative

Some employers offer health stipends as a simpler alternative. With a stipend, you provide employees with a fixed amount of money added to their paychecks for health expenses.

The tradeoff? Stipends are taxable income. Both employers and employees pay payroll taxes on stipend amounts. While easier to administer, stipends cost more overall due to the tax implications.

For most businesses, an HRA provides better value because contributions remain tax-free when structured correctly. Understanding the question of whether an employer reimburses an employee for health insurance helps clarify why compliant structures matter so much.

Benefits of Employee Health Insurance Reimbursement

Adopting a reimbursement model offers several advantages over traditional group health plans.

Cost control allows employers to set their contribution amounts and maintain predictable monthly expenses without surprise premium increases mid-year. HRA contributions are 100% tax-deductible for employers, and employees receive reimbursements tax-free.

Employee choice lets workers select plans that match their individual healthcare needs rather than accepting a one-size-fits-all group option. Simplified administration comes from partnering with a platform that handles compliance and claims processing, reducing the burden on HR teams. Offering personalized health benefits also helps attract talent when competing with larger organizations.

How Venteur Simplifies ICHRA Administration

Managing an ICHRA requires attention to compliance details, employee communications, and claims processing. At Venteur, we provide a comprehensive platform that handles these complexities for employers across all 50 states.

Our platform offers a user-friendly experience for both administrators and employees, with no setup fees or monthly minimums. Expert support guides you through implementation and ongoing management. Integration capabilities connect with existing HR and payroll systems to streamline workflows.

For brokers advising clients on health benefits strategy, we provide the tools and expertise to implement ICHRA solutions efficiently.

Getting Started

Moving from a group health plan to a reimbursement model takes planning, but the process is manageable with the right partner. Start by evaluating your current health benefits spending and employee needs. Determine which HRA type fits your organization based on size and existing coverage.

Your employees gain flexibility and choice. Your organization gains cost predictability and simplified administration when you properly reimburse employees for health insurance through a compliant arrangement.

Ready to simplify your health benefits administration? Discover how Venteur can help your organization today.