Many small business owners ask whether they can simply reimburse employees for the cost of their own health insurance instead of offering a traditional group health plan.
The short answer is: Yes, but not by simply giving employees tax-free reimbursements.
Federal law generally does not allow employers to reimburse employees for individual health insurance premiums on a tax-free basis unless the reimbursement is provided through an approved arrangement, such as a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) or an Individual Coverage Health Reimbursement Arrangement (ICHRA).
Understanding the rules is important because an improperly designed reimbursement program can create tax and compliance issues.
Can an Employer Simply Reimburse Health Insurance Premiums?
Generally, no.
An employer cannot simply decide to reimburse employees for individual health insurance premiums on a tax-free basis outside of an approved arrangement.
For example, an employer generally should not:
- Give employees a monthly allowance specifically for health insurance.
- Reimburse insurance premiums through payroll without an approved plan.
- Offer tax-free premium reimbursements without establishing a compliant reimbursement arrangement.
Fortunately, there are compliant alternatives that allow employers to help employees pay for individual health insurance.
What Is a QSEHRA?
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) allows eligible small employers to reimburse employees for qualified medical expenses, including individual health insurance premiums, up to annual IRS limits.
A QSEHRA is specifically designed for smaller employers that do not offer a traditional group health plan.
Employees purchase their own individual health insurance, and the employer reimburses eligible expenses according to the terms of the plan.
Who Can Offer a QSEHRA?
A business may generally offer a QSEHRA if it:
- Has fewer than 50 full-time equivalent employees.
- Does not offer a group health plan to its employees.
- Establishes the QSEHRA according to IRS requirements.
- Makes the benefit available on the same terms to eligible employees, subject to permitted variations.
If your business already offers a traditional group health plan, a QSEHRA is generally not available.
What Expenses Can a QSEHRA Reimburse?
Depending on how the plan is designed and applicable regulations, a QSEHRA may reimburse:
- Individual health insurance premiums
- Medicare premiums
- Doctor visits
- Prescription medications
- Dental expenses
- Vision expenses
- Other qualified medical expenses under IRS rules
Employers choose the reimbursement allowance, up to the applicable annual IRS maximum.
What Is an ICHRA?
An Individual Coverage Health Reimbursement Arrangement (ICHRA) is another option for employers that want to reimburse employees for individual health insurance.
Unlike a QSEHRA, an ICHRA:
- Can be offered by employers of any size.
- Does not have the same statutory reimbursement limits as a QSEHRA.
- Can be offered alongside a traditional group health plan for different employee classes, provided applicable rules are satisfied.
An ICHRA provides significantly more flexibility for larger employers or businesses with diverse employee populations.
QSEHRA vs. ICHRA
Although both arrangements allow employers to reimburse individual health insurance premiums, they are designed for different situations.
| Feature | QSEHRA | ICHRA |
| Employer size | Small employers | Employers of any size |
| Group health plan allowed? | No | Yes, for different employee classes if IRS rules are followed |
| Annual reimbursement limits | Yes | No statutory annual maximum |
| Individual insurance required | Yes | Yes |
Choosing between the two depends on your company’s size, existing benefits, and long-term strategy.
Why Do Small Businesses Choose a QSEHRA?
Many small employers find that a QSEHRA offers an affordable way to provide healthcare assistance without sponsoring a traditional group health insurance plan.
Advantages may include:
- Predictable employer costs
- Tax-advantaged reimbursements
- Flexibility for employees to choose their own individual coverage
- Simpler budgeting compared to annual group insurance renewals
For businesses with only a handful of employees, a QSEHRA can be an attractive alternative to a traditional group health plan.
Is a QSEHRA Right for Every Employer?
Not necessarily.
A QSEHRA works well for many small employers, but it is not appropriate in every situation.
Factors to consider include:
- Number of employees
- Existing health benefits
- Budget
- Employee demographics
- Recruiting goals
- Whether the business already offers group health insurance
Some employers are better served by a traditional group health plan, while others may benefit more from an ICHRA or another reimbursement strategy.
How Empower Can Help
Choosing the right health reimbursement arrangement involves more than selecting a benefit.
Employers must also establish compliant plan documents, communicate the benefit to employees, administer reimbursements, and comply with applicable IRS requirements.
Empower helps employers administer health reimbursement arrangements, including QSEHRAs, while providing responsive support throughout the plan year.
Whether you are evaluating a QSEHRA for the first time or comparing it with other benefit options, our experienced team can help you understand your choices.
Talk to an Expert About Health Insurance Reimbursements
If you are considering reimbursing employees for their own health insurance, it is important to choose a compliant approach that fits your business.
Contact Empower to learn whether a QSEHRA, ICHRA, or another reimbursement arrangement is the right solution for your organization.
FAQ
Can I reimburse employees for Marketplace insurance?
Yes, through certain compliant arrangements such as a QSEHRA or ICHRA, depending on your circumstances.
Can I reimburse Medicare premiums?
Yes, in some situations a QSEHRA or ICHRA may reimburse Medicare premiums if plan requirements are met.
Can I simply increase an employee’s salary to pay for insurance?
You can always increase wages, but additional taxable wages are not the same as providing tax-free reimbursements through a compliant health reimbursement arrangement.
