A number of small businesses owners want to know if it’s possible to reimburse the individual health insurance of their employees, rather than providing a standard group policy. Additionally, they want to know if such an arrangement is taxable.
The IRS Weighs In
With existing IRS rules, it is possible for small businesses to provide reimbursement for the health insurance of their employees in a manner that is tax beneficial. The best way of doing so is through an HRA, or health reimbursement arrangement. When the HRA is IRS compliant, businesses can reimburse the health insurance of their employees in a way that is tax free for both parties. However, the HRA must follow specific procedures, which includes regulations which are strict in regards to establishing plan documents which are formalized.
How Health Reimbursement Arrangements Work
The IRS has well established rules which dictate how HRAs function and how businesses should establish them for compliance. To acquire the desired tax benefits, the HRA will need to be company funded one hundred percent, with no contributions from employees. Businesses are also prohibited from slashing the salaries of their employees to fund the contribution, even when the employee is open to it.
It is also mandatory that employees receive basic essential coverage so they can receive reimbursements which are income tax free. Finally, any plan documents which are formalized must define medical expenses which are qualified. Some HRAs will have yearly contribution limits, whereas others, such as integrated HRAs and HRA standalones don’t require yearly contribution limits.
It is important for health reimbursement plans to fall within IRS formalized document plan procedures as well as structure. It is not sufficient to ask employees to present receipts associated with healthcare and then provide reimbursement. Without plan documents which are formalized, reimbursements will not be tax free or compliant.
Businesses that do not wish to establish compliant procedures or documents do have the option of giving their employees raises, which are referred to as wage increases which are informal. At the same time, the business must cover payroll taxes for these additional funds, so their employees will end up paying income as well as payroll tax.
Options For Compliance
There are three options for the reimbursement of health care which are IRS compliant, and these are integrated HRA, HRA standalone, and QSEHRA, or qualified small employer health reimbursement arrangement. For each of these three options, reimbursement will always be tax free for businesses and their employees will incur no income tax. However, employees may only get tax free reimbursements should they have MEC, or minimal essential coverage. Any employees that do not have MEC will have to report their reimbursements in the form of taxable income when the year ends. For QSEHRA, reimbursement for health insurance will not be taxable for businesses or their employees, so long as the correct plan documents have been established.