Many may wonder whether or not an employer can reimburse an employee for health-insurance costs. The answer isn’t straightforward because regulations have changed several times over the past few years.
In fact, for a few years under IRS guidance, which was related to putting the Affordable Care Act (ACA) into effect, employees couldn’t be directly reimbursed by their employers for individual market health-insurance costs. Moreover, employers that did reimburse employees faced stiff financial penalties if they didn’t comply.
However, as of 2017, the door has been opened for small-business owners to reimburse employees for individual market health-insurance premiums thanks to the 21st Century Cures Act. The Trump administration opened things up even further for businesses of all sizes to reimburse employees for individual market coverage costs in 2019.
Before 2017, one of the main concerns was that a group health plan would be created when employers reimburse medical expenses. In turn, that health plan would have to comply with all the various laws that govern employer-sponsored group health plans.
IRS Code Section 213(d) defines medical expenses, which are summarized in IRS Publication 502. The following are typical examples of an employee’s medical expenses that some employers might wish to reimburse outside of formal ERISA group health plans:
- Medical-wellness expenses outside of a health program that is integrated with the group health plan
- High-cost pharmaceuticals
- Out-of-network providers that aren’t listed under the group plan
- Services not adequately covered by the group health plan (e.g., mental-health expenses, autism-related expenses, infertility expenses, and transgender-reassignment surgery-related expenses)
- Cost-sharing under the group plan (i.e., deductibles, copays, coinsurance)
- Services or items not covered by the group plan
In fact, reimbursing employees for health insurance triggered legal compliance issues with a whole host of laws, including COBRA, The Consolidated Omnibus Budget Reconciliation Act, ERISA, The Employee Retirement Income Security Act of 1974, and HIPAA, the Health Insurance Portability and Accountability Act.
Simply put, when an employer reimbursed an employee’s health-care costs, it created a new group health plan. To get around this problem, one solution was for employers to provide cash to an employee that’s taxable and that isn’t conditioned on the actual medical expenses incurred by the employee. For instance, the employer could provide a stipend, raise, or bonus, subject to payroll and withholding taxes.
However, the moment the employer conditioned any additional payments to the employee on receiving the employee’s medical receipts, it would trigger a group health plan.
President Obama signed H.R.34; the 21st Century Cures Act, into law in 2016. It went into effect in 2017, and it allowed businesses with less than 50 employees to begin reimbursing medical expenses. To do that, employers were permitted to establish Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs).
If the small business offers no group health insurance plan, QSEHRA allowed businesses to reimburse their employees for some or all costs associated with purchasing individual market health insurance. Moreover, purchasing that insurance could be on-exchange or off-exchange and would be entirely tax-free.
As of 2020, the maximum an employer could reimburse an employee was $5,250 for a single employee’s coverage. The maximum for family coverage was $10,600. The IRS indexes these amounts each year.
In 2021, the maximum reimbursement allowed using a QSEHRA for a single employee is $5,300 and $10,700 for family coverage. It’s worth noting that these amounts are prorated by month.
As noted above, new QSEHRA rules established under the Obama administration work for small businesses, while regulations opened up to larger firms under the Trump administration.
Whether or not premium subsidies are available to small businesses that don’t offer health insurance depends on the cost of coverage in the applicant’s area and other factors like family size and income. Generally, in most cases, subsidies are available as long as the applicant’s total income isn’t more than 400% of the poverty level.
If your business chooses to reimburse employees for health-care costs, keep in mind that you have a few benefits. These include tax deductions. If you match what your employee contributes, that money is 100% tax-deductible. Additionally, you can save money on health-insurance premiums while helping your employees to pay for higher costs by using funds, which are tax-free.
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