Note: None of this should be taken as legal or tax advice.
The easiest way to offer health benefits today is via a
health reimbursement arrangement (HRA). With the right HRA Software, employers can now record tax-free health care reimbursements via their existing payroll service (e.g. Paychex, ADP, Quickbooks, etc.). When reimbursing employees tax-free via payroll, it is important to understand the difference between a payroll deduction and a payroll reimbursement.
What is a payroll deduction?
A payroll deduction is the removal of dollars from an employee paycheck.
What is a payroll reimbursement?
A payroll reimbursement is the addition of dollars to an employee paycheck.
How does a payroll reimbursement differ from a payroll deduction?
When an employer reimburses an employee through an HRA, employee gross salaries are not affected. An employer simply adds the dollars that have been approved for employees' qualified medical expenses (e.g. insurance premiums, doctor visits, etc.) to the employee's paycheck using a non-taxable line-item. This concept is often referred to as a "tax-free addition" or "negative deduction" on the paycheck.
What obligations does an employer have to report payroll reimbursements?
IRS Notice 2012-9 clarified that an employer is not required to report payroll reimbursements made through an HRA.
