Can My Business Reimburse Employees for Individual Health Insurance?
Yes, but usually not by simply writing an employee a check and calling it a tax-free benefit. If a California employer wants to reimburse employees for their own individual health insurance, the reimbursement should normally be structured through a compliant Section 105 Health Reimbursement Arrangement (HRA), such as an ICHRA or a QSEHRA.
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Don’t Just Reimburse Individual Premiums Informally
The IRS has warned that certain employer payment plans that reimburse employees for individual health insurance premiums can violate Affordable Care Act market reform requirements and potentially trigger significant penalties if not structured properly. See the IRS guidance on Employer Health Care Arrangements.
In plain English, simply reimbursing employees through payroll or writing reimbursement checks may not be compliant. Before setting up any reimbursement arrangement, make sure the plan is structured correctly.
Option #1 – ICHRA
An Individual Coverage Health Reimbursement Arrangement (ICHRA) allows employers to reimburse employees for individual health insurance premiums and eligible medical expenses.
Official information is available from HealthCare.gov and the IRS HRA guidance page.
An ICHRA can be particularly attractive for employers that do not want to sponsor a traditional small group health insurance plan.
Option #2 – QSEHRA
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is generally available to smaller employers that do not offer a group health plan.
HealthCare.gov provides an overview of QSEHRAs, while the IRS provides detailed guidance in IRS Notice 2017-67.
Option #3 – Traditional Group Health Insurance
Sometimes a traditional small group health insurance plan remains the simplest and most predictable solution.
You can compare carrier options on our California Small Group Carriers page or request a group health insurance quote.
What About Covered California Subsidies?
An ICHRA or QSEHRA can affect an employee’s eligibility for premium assistance through Covered California.
See Covered California’s guidance regarding Health Reimbursement Arrangements and their HRA Affordability Tool.
What If I Want To Reimburse More Than Premiums?
If you want to reimburse deductibles, copays, dental expenses, vision expenses, or other qualified medical expenses, see our page on Section 105 Medical Expense Reimbursement Plans (MERPs).
The IRS definition of qualified medical expenses is found in IRS Publication 502.
Owners, Family Members, and Management Carve-Outs
Many employers are really asking whether they can reimburse only owners, executives, managers, spouses, or family members.
Before doing so, review our discussion of Management Carve-Outs. Ownership rules, discrimination rules, payroll reporting, and tax treatment can become complicated quickly.
Quick Decision Guide
- Want to reimburse employees for individual health insurance? → ICHRA
- Small employer with no group plan? → QSEHRA
- Want a traditional employer-sponsored plan? → Small Group Health Insurance
- Want to reimburse deductibles and other medical expenses? → MERP
- Looking for employer tax deduction rules? → Section 106 Employer Health Insurance Deduction
Bottom Line
A business may be able to reimburse employees for individual health insurance, but it should usually be done through a properly structured Section 105 arrangement such as an ICHRA or QSEHRA.
If you’re comparing individual coverage, group coverage, ICHRAs, or QSEHRAs in California, feel free to email me or schedule a Zoom consultation.
