In short, no. Health insurance reimbursements are not taxable. However, there are a few circumstances in which you, within the role of an employer or employee, may be eligible for tax-free healthcare reimbursements.
Health Reimbursement Arrangements (HRAs)
An HRA, or Health Reimbursement Arrangement, is a type of US employer-funded healthcare system that allows employers to reimburse certain employees for their out-of-pocket medical expenses. It may also include payments for personal health insurance premiums as well. It is not a healthcare plan to be used for coverage, but rather a way for employers to provide an allowance of tax-free money offered through a monthly reimbursement. Typically, this allows employees to pay for extra healthcare outside of their regular coverage.
How Do Health Reimbursement Arrangements Work?
Health Reimbursement Arrangements work in a reimbursement system, meaning the employee must first pay out-of-pocket for their medical expenses. Once the expense is approved by the employer as a valid medical expense, they are reimbursed directly. Depending on your employer, these reimbursements and the validity of treatments vary. Generally speaking, the process usually works a little something like this:
- The business sets up a standard allowance amount
- The employee makes a medically-related purchase or office visit
- The employee submits proof of purchase
- The employer approves the purchase
- The business reimburses the employee
However, this process can only continue while the original allowance still maintains an unused balance. The employer will not reimburse their employee or release any more funds until the next month.
What Are The Benefits of Health Reimbursement Arrangements?
HRAs offer benefits for both the employee and the employer, especially if it is a small business. For employees, the reimbursements are tax-free when they file a claim. They receive extra funds for additional healthcare coverage outside of their plan without it negatively affecting their income. For employers, this is a cost-friendly option because the employer gets to choose the monthly allowance given and the features of the plan that work best for their business’s budget and employees.
The Cons of Health Reimbursement Arrangements
Although HRAs do come with many benefits, there are a few cons to take note of. One common complaint of an HRA system is that it does not transfer with the employee. Since HRAs are employer-funded reimbursement accounts, if the employee quits, they will not be reimbursed any money that was used or unused once they decide to leave the company. Additionally, HRAs do not account for self-employed individuals. You must work in a company that provides HRAs to receive this benefit. You likely won’t be eligible for benefits if you are just filing as a self-employed individual.
Requirements an HRA Must Meet
To be eligible for tax-free exemption, an HRA request must be considered a qualified healthcare expense under IRS Section 213(d). A few of the eligible medical expenses are listed below.
HRA expenses include:
- Payments towards a policy’s deductible
- Individual health insurance premiums
- Individual dental or vision premiums
- Office Visits
- Prescription drugs (or nonprescription with a doctor’s note)
- Travel expenses to/from a healthcare site
Types of Compliant Health Reimbursement Options
There are several forms of HRA coverage a company can opt into and provide to their employees. Below are a few common forms of HRA options that your company may offer.
Group Coverage HRA
If the employer already offers a group health plan, this option can be ideal for them. It is only available to employers that currently offer group healthcare coverage and is only available to the employees that took advantage of the employer-provided healthcare plan. This is beneficial because with the inclusion of an HRA, the cost of premiums are usually lowered – but the range of coverage available is maintained.
A QSEHRA, or a Qualified Small Employer HRA is a plan created for small businesses of 50 full-time employees or less. If an employer chooses this form of HRA, they can offer a monthly allowance of $5,150 per single employee or a monthly allowance of $10,150 for employees with a family.
One-Person Stand-Alone HRA
This form of HRA must be structured so that only one employee can benefit from this HRA. A One-Person Stand-Alone HRA is unique in that it has no set amount for the monthly allowance and no prior group health insurance requirement. This form of HRA requires you to speak to your employer first, since this option can only be given to one sole employee.
Although these are common forms of HRA your employer will typically offer, there are also other forms of HRA accounts available for employees. These include the Excepted Benefit HRA, Individual Coverage HRA, and The Retiree HRA. If you are not satisfied with or your company does not qualify for an HRA listed above, take a look at one of the other three HRA options that may suit you best!
HRA Implementation Strategies
If you are an employer looking to maximize your healthcare benefits and add an HRA into your business, here are a few pointers to seamless implementation. You must first determine your business entity type and make sure you are a business owner who has W-2 employees. Once you have done this, you must determine the HRA that best suits your business’s and employees’ needs as well and make sure you reach its designated requirements. Once you have this noted, you will need to create and gather your legal plan documents, notify your employees of the new implementation, and create a system to substantiate employee claims. Typically, there are businesses or services online that can help business owners implement their own HRA with more ease.