If you’re wondering, “How does a medical reimbursement plan work?” or "What is a medical reimbursement plan?" or "Is employee medical reimbursement possible?" you should know that there are two types of health reimbursement arrangements (HRAs) that make it possible to reimburse employees for health insurance premiums and qualified medical expenses tax-free. Instead of funding a group health plan, employers can set a monthly budget for benefits and reimburse employees tax-free for plans they choose on the individual market. Let’s explore the options to a medical reimbursement plan (also known as health reimbursement plans, or HRAs) and go through how HRAs actually work.
What is a medical reimbursement plan?
Medical reimbursement plans are typically referred to as health reimbursement arrangements, HRAs, health insurance reimbursement, employee medical reimbursement. Despite the many misnomers, they allow an employer to reimburse for medical expenses and/or insurance premiums on a tax-free basis.
Under these arrangements, employees purchase their own health insurance on the open market and then submit claims to their employer to get reimbursed for the cost of their premium and if allowed, all qualified medical expenses.
Instead of funding a group health plan, employers can set a monthly budget for benefits and reimburse employees tax-free for plans they choose on the individual market.
HRAs and health care reimbursement
HRAs allow employers to reimburse for health care. HRAs are a new benefits model that allows employers to reimburse employees for health insurance rather than buying it for them.
HRAs are built on a series of regulations to make sure they are being offered fairly and are achieving their intended aim, which is to help employees pay for benefits tax-free. The regulations also do their best to prevent the reimbursements from being used for unfair things, like executive compensation, fraud, discrimination, money laundering, etc.
→ Here’s a handy 4-step guide to how HRAs work!
→ Here's a helpful post that covers whether or not health insurance reimbursement is taxable.
How does health insurance reimbursement work?
Let’s get into the nitty-gritty and answer the oft asked question: “How does health insurance reimbursement work?” Employers now have more options than ever when it comes to offering health insurance to their employees. Health benefits are a proven, effective retention strategy, so you already know it’s important to your current and future employees.
Health reimbursement arrangements, or HRAs, are a great way to save you money and keep your employees happy by allowing them to choose their own providers and doctors.
Is employee medical reimbursement possible?
Yes! With a health reimbursement arrangement.
HRAs allow an employer to reimburse for medical expenses and/or insurance premiums on a tax-free basis. Under these arrangements, employees purchase their own health insurance on the open market and then submit claims to their employer to get reimbursed for the cost of their premium and if allowed, all qualified medical expenses.
Types of medical reimbursement plans
- The qualified small employer HRA (QSEHRA) requires your business to be small, with less than 50 Full Time Equivalent employees, and you can't offer a group plan at the same time. If you meet those qualifications, you can use an HRA administration tool (like ours!) to create your QSEHRA, decide how much you’ll reimburse each month (up to the contribution limits), let your employees choose the plan that works best for them, and reimburse them when they submit receipts!
QSEHRA basics:
Employees must be covered by a Minimum Essential Coverage (MEC) health insurance plan in order to receive QSEHRA reimbursements. However, there are a few types of plans to be aware of that cannot be reimbursed through a QSEHRA, even with a Minimum Essential Coverage Plan. This post goes into more detail about which plans work and which plans don't work with QSEHRA.
- The individual coverage HRA (ICHRA) is almost like a “super-charged” version of the QSEHRA. Instead of being capped at 50 employees, employers of any size can set up an ICHRA for their teams. There are also no contribution limits with this HRA. Another key differentiator from HRAs in the past? ICHRA allows business owners to customize their reimbursements across different classes of employees. While everyone must be treated fairly within a certain class, reimbursement rates can vary between full time, part time, seasonal, remote, etc.
ICHRA basics:
With ICHRA, employers can offer as much or as little as they’d like as long as it’s offered fairly to each class.
- Give all employees the same amount: For example, you could give all employees $200/mo.
- Vary reimbursements by family size: Since individual market plans cost more for families, employers can offer more for larger families. For example, an employer could offer $200 for single employees, $300 for married employees, and $600 for employees with families. Or they could offer $100 for each additional dependent.
- Vary reimbursements by employee age: Similarly, since individual plans typically cost more for older employees, employers can elect to offer higher reimbursement amounts to older employees.
- Vary by both family size and age: Combo of the above two options.
Medical expense reimbursement with ICHRA + QSEHRA
Most employers choose to allow medical expenses to be reimbursed too. Eligible expenses include doctor visits, copays, dental cleanings, prescriptions, eye glasses, diabetes supplies, etc.
We make it easy for employees to just snap a picture of their receipts for reimbursement. Employers have a lot of flexibility over what is reimbursed. Understanding the impact of these options can go a long way towards helping the employer achieve their objectives and keep their budget in check.
Check out this comprehensive list of the medical expenses that are reimbursable with an HRA.
How does an HRA work?
The way HRAs work is fairly simple. First, an employer determines a set budget for monthly reimbursements. Then, employees purchase an individual health insurance plan that works for their family. Lastly, they submit receipts and get reimbursed on their paycheck. These arrangements are tax-free!
Cool, right?
Why HRAs are great: Employees pay for health expenses, you reimburse them, tax-free.
Who funds an HRA?
An HRA is funded solely by an employer. Employees cannot contribute. The "funds" are only available after an expense has been incurred, so there is no need to pre-fund an account.
Ready to learn how much you can reduce benefits cost?
Are there tax benefits to HRAs?
Absolutely! That's why we love them. HRAs are not subject to income tax, payroll tax, or employer tax.
What can be reimbursed with an HRA?
Employers can choose to reimburse for health insurance premiums and qualified medical expenses or just reimburse for premiums. That's at the discretion of the employer.
- Major medical individual health insurance premiums (metal tier in the name!)
- Dental care premiums
- Vision care premiums
- Medicare Part A or B, Medicare Part C, and supplemental plans
- COBRA premiums
Qualified medical expenses can also be reimbursed! While there are more than 200 items on the IRS list, here are a few of our favorites:
- Copays
- Prescriptions
- Tests and scans
- Eye glasses + contacts
- Therapy + Counseling
- Chiropractic Care and Acupuncture
- Over the Counter Drugs
- Feminine hygiene products
- Sunscreen
For the full list, check out our post on "What expenses are eligible through my HRA?
Can you use an HRA with an HSA?
The answer is yes, but there's a catch (isn't there always?). The IRS has some pretty specific rules about how these two tax-advantaged tools work together.
Here are the main rules to remember.
You can use HSA funds any time to cover medical expenses, as long as you don't submit for reimbursement of the same expenses from your employer. No double dipping. More on HRAs and HSAs here.
Do HRA funds rollover?
Since HRAs are arrangements, not accounts, the funds are kept my the employer and do not roll over.
Ask us about tax-free health insurance reimbursement!
A step by step guide to how HRAs work
1. Employers design their plan and set reimbursement allowances
In general, employers have a lot of flexibility with how they design and implement a HRA. Especially with the ICHRA, with its 11 different classes, employers can reimburse different groups at different rates. HRAs can be scaled to reimburse more for employees with families or by employee age. An overarching rule though is that employees must be treated fairly. Very important!
2. Employees sign up for the health insurance plan of their choice and pay their medical bills
More than likely, your employees are going to be very excited about this option. Instead of being locked into a group plan that they had little to no input about, they can choose their own doctors and providers! They must be enrolled in an insurance plan to qualify for the HRA, but it can be a spouse’s plan (if it's a QSEHRA), their parent’s (if they are under 26), or an individual plan that meets MEC.
3. Employees provide proof of their expenses
After their doctor’s visit or a prescription refill, employees simply snap a picture of their paid bill (or receipt) and submit it for reimbursement. This may seem obvious but often gets overlooked! Employees have to prove they spent money on an eligible health expense before they can be reimbursed.
4. Employers reimburse the employee
The key takeaway here is that payments are actually reimbursements. Employers reimburse employees' premiums. Employees will pay the insurance company or doctor’s office directly and then submit a claim to get reimbursed for their expenses tax-free.
While Individual Coverage HRAs do not have maximum or minimum reimbursement amounts, all QSEHRA reimbursements are subject to annual maximums and become available to employees on a monthly basis. This means employees can’t take the full annual amount in January—instead, the funds become available to employees each month.
Pro-tip: Unclaimed funds stay with the employer. If an employee is not eligible or does not make a claim in a given plan year, the employer keeps the money. Sweet!
Still have questions about how HRAs work?
We are ready to chat on our website if you have any specific questions about your business and how HRAs could help. Setting up a small business HRA is simple and quick, and our team is here to help if you need it.
Other exciting reads →
- What are HRAs?
- The Ultimate HRA Guide
- What's the best HRA for small business?
- About our HRA Administration Platform
Is a medical reimbursement plan right for you?
If you still have questions about medical reimbursement plans and reimbursing health insurance premiums, we have a slew of resources available for you, and a group of experts standing by.
Check out our comprehensive guides to HRAs, ICHRA and QSEHRA. This guide walks you through what can be reimbursed with QSEHRA. Chances are, if you have a question about HRAs, we've got an answer for you!
