Is Your Health Insurance Reimbursement Taxable?

Access to affordable health care matters to your people. Pew Research places health care costs as the third-highest priority for voters in the 2024 U.S. election, beating other important issues like gun violence, terrorism, racism, and the state of public K-12 schools. 

But for employers, it’s challenging to afford to fund adequate health coverage for their individual team members. Soaring costs suggest that medical insurance has increased by 8.9% in 2024, compared to 8.2% in 2023. That’s why many companies may opt for a health insurance reimbursement model, to keep control of these costs while offering flexibility and choice to employees. 

This guide explores the differences between health reimbursement arrangements and health insurance stipends. We’ll explore the tax implications for both employers and employees so you can choose the best fit for your business. 

How do health reimbursement arrangements work?

A health reimbursement arrangement is an employer-funded plan that reimburses employees for out-of-pocket medical expenses. Employers reimburse their workers for a range of expenses, including:

• Medical expenses: Doctor’s visits, hospital stays, surgery, lab tests and diagnostics, prescription drugs, medical equipment, travel, fertility expenses, etc. 
• Dental and vision care: Check-ups, surgery, etc. 
• Preventive care: Immunizations, screenings, physical exams, etc. 
• Mental health: Counseling, substance abuse treatments, etc. 
• Rehabilitation: Physiotherapy, occupational therapy, speech therapy, etc.  
• Alternative treatments: Acupuncture, reflexology, Reiki, etc. 
• Health insurance premiums: Medical, dental, vision premiums, etc. 

In a typical reimbursement model, the employee first clocks up any eligible medical expenses. They then file a reimbursement claim with their employer, who approves it and refunds the allowance to the employee. 

What are the four types of HRAs?

There are four main types of health reimbursement arrangements (HRAs) available: 

Integrated or group coverage HRA

This type of HRA is linked to the employer’s group health insurance plan. When employees need extra funds for expenses not included in the primary group policy, the HRA acts as this additional source. 

Qualified small employer HRA (QSEHRA)

A QSEHRA is specifically designed for small businesses with fewer than 50 full-time employees. Employers can offer a designated yearly allowance to reimburse their employees’ medical expenses, up to an IRS contribution limit of $6,150 per individual and $12,450 per family. 

Individual coverage HRA (ICHRA)

Individual coverage health reimbursement arrangements give employees the option to choose their own health insurance. Employers provide a set allowance, and employees choose the most suitable plan for themselves and their dependents. 

ICHRAs don’t have any contribution limits and are suitable for companies of any size. 

Excepted benefit HRA (EBHRA)

An EBHRA is available for employers who offer a group health insurance plan but also want to provide additional benefits for specific expenses not covered by the plan. This could include vision or dental care expenses. EBHRAs have a maximum contribution limit of $2,100 per year. 

3 advantages of health reimbursement arrangements

Health reimbursements offer distinct advantages over other methods of paying for health insurance: 

• Cost control: With HRAs, employers spend a set amount per month or year, making it easy to predict and budget for health costs. 
• Flexibility: Employees can tailor their health insurance coverage to their individual needs, choosing the most suitable plan for themselves and their dependents. 
• Recruitment and retention: In a tight job market, health insurance reimbursements can be a valuable perk to attract top-tier talent. They also ensure employees feel valued and supported, increasing retention rates. 

Is a health reimbursement arrangement taxable?

No, unlike other types of benefits, health reimbursement arrangements are tax-advantaged if you closely follow IRS rules. Employers who don’t comply with these stringent regulations may cause the company and its employees to pay tax on their HRAs. Here are the four main ways to achieve your tax savings: 

1. Your HRA must be employer-funded 

Health reimbursement arrangements don’t provide scope for employees to top up their contributions. Unlike alternatives like a health savings account, HRAs must be 100% employer-funded. 

2. Your HRA must be separate from employee salaries 

Employers can’t bundle HRA costs with employee salaries. Whether you pay annual or hourly wages, health reimbursement costs must be distinctly separate from salaries—employers can’t lower anyone’s income to accommodate the HRA. 

3. Your HRA must meet minimum essential coverage requirements 

Depending on the HRA, some types require minimum essential coverage requirements to avoid income tax. This means the health insurance reimbursement must cover a certain standard and breadth of healthcare services and employee expenses. 

4. You must provide formal plan documents alongside your HRA 

Employers offering HRAs to their employees must generate essential documentation as part of their plan. This must include a summary plan description (SPD) that outlines the specifics of your HRA, including how it works and what expenses are covered. You should also generate employee guidelines or regulations for submitting reimbursement claims.

What are healthcare stipends?

Small employers that don’t trigger the Affordable Care Act’s obligations to provide health insurance may not want the red tape and compliance associated with providing HRAs. In this case, healthcare stipends may be a good fit. 

With this model, employers provide their employees with a set monthly or annual allowance for their healthcare purchases. Unlike HRAs, employers do not require proof of an eligible health expense before providing the allowance. Employees independently select and pay for their healthcare costs and use the stipend to offset these expenses. 

Are healthcare stipends taxable?

Yes, healthcare stipends are taxable. Employers pay payroll tax on them, and your workers will pay income tax on the value they receive. Although your business no longer has to spend the time required to maintain IRS compliance, you must weigh the extra tax payment against these resource savings and the additional financial burden your people face paying tax on their gross income. 

Create a tax-advantaged health reimbursement arrangement with Benepass

With the Benepass HRA, your people will feel empowered to personalize their healthcare. Our card-first approach allows employers to add a fixed allowance to each employee’s account, enabling them to spend money on various medical expenses without being required to front the costs and wait for reimbursement. In 98% of cases, claims are substantiated electronically at the point of sale, thanks to cards layered with IIAS technology and partnerships with a range of medical, dental, vision, and pharmacy merchants. 

Here’s how it works: 

• Step 1: You’ll define your HRA eligibility rules, setting up categories such as medical travel, fertility, mental health, etc. 
• Step 2: You’ll decide how much you’d like to contribute to the HRA, in line with IRS contribution limits.
• Step 3: We’ll link Benepass to your payroll system to simplify employee enrollment and automate tax compliance. 
• Step 4: You’ll communicate your HRA to your employees and invite them to join our platform. 

Want to learn more about health insurance reimbursements? Book a free Benepass demo or contact sales@getbenepass.com to connect with a benefits specialist.