Federal regulations prohibit businesses from paying directly for employee's individual health insurance premiums, outside of an HRA (Health Reimbursement Arrangement), or other IRS/HIPAA/ERISA-qualified tax-free vehicle (e.g. Section 125).

Some businesses might want to pay directly for an employee's individual health insurance plans without utilizing an ERISA and HIPAA-compliant HRA, but doing so may put the business out of compliance with federal regulations and may increase the business's (and employee's) tax liability.

Comparison charts provide an excellent way of summarizing complex information.  As a follow-up to yesterday's HRA case studies, check out this HRA, HSA, FSA, PRA comparison chart. It's a good summary of the key differences between the four primary types of health care reimbursement accounts and arrangements.

There are four basic types of accounts and arrangements that companies use to provide tax-advantaged medical expense and insurance premium reimbursement to employees.

Company Funded Arrangements

Health Reimbursement Arrangements (HRAs)

Health Reimbursement Arrangements are tax-advantaged arrangements (not accounts) that employees can use to receive reimbursement for qualified medical expenses, including health insurance premiums. An HRA can supplement a group policy or provide employer funds for an individual health policy. All employees, former employees, and retirees qualify to have an HRA.  HRAs must be 100% funded by employers.


Employee Funded or Owned Accounts

Flexible Spending Accounts (FSAs)

Flexible Spending Accounts are tax-advantaged arrangements where employees convert pre-tax wages into a fixed annual fund to pay for out-of-pocket medical expenses. FSA funds cannot pay for health insurance premiums. All employees qualify to have an FSA. FSAs are generally 100% funded by employees, although employers are allowed to offer incentive Flex Credits as FSA contributions.

Premium Only Plans (POPs)

Premium only Plans are effectively an FSA for individual or family health insurance premiums, as allowed under new IRS regulations effective 1/1/09. Employers can either reimburse employees for individual health insurance policy premiums or pay such premiums directly to insurance carriers. All employees qualify to have a PSA.

Health Savings Accounts (HSAs)

Health Savings Accounts are tax-advantaged consumer savings accounts similar to an IRA or 401k that consumers can use to pay for qualified medical expenses. HSAs are supplements to health insurance since HSA funds cannot generally pay for health insurance premiums. Only employees who obtain HSA-qualified high deductible health insurance from an employer’s group plan or from a individual health policy qualify to have an HSA. HSAs can be funded by employers, employees, or third parties.

HRAs, POPs and tax free individual health insurance are 100% allowed in Florida if administered the correct way.

HRAs, POPs and tax free individual health insurance are 100% allowed in Nebraska if administered the correct way.