Premium Reimbursement Plans (PRP)

An Overview of Premium Reimbursement Plans (PRPs)

A Premium Reimbursement Plan (PRP) is similar to a 401k plan, but for individual health insurance. A PRP allows employers and employees to pre-tax individual health insurance premiums, saving Employers 7.65% in payroll taxes and employees 20-40% in federal and state taxes. Essentially, it is a way for employers who would not otherwise offer health benefits to offer them at zero net cost to the company.

How Employees Benefit from a Premium Reimbursement Plan

With Premium Reimbursement Plans, employees save 20-40% by paying health insurance premiums with pre-tax rather than after-tax dollars. In addition, employees are able to choose the individual health plan that works best for them, their spouse, and their dependents, unlike a blanket group plan. They can even choose to cover the cost of supplemental coverage such as dental or vision insurance with these pre-tax dollars.

How Employers Benefit from a Premium Reimbursement Plan

With PRPs, employers save 7.65% on every dollar in FICA and FUTA tax. For employers who would otherwise not offer health benefits, or are thinking of canceling them, offering a PRP can greatly improve a company’s ability to recruit and retain good employees.

How Does a Premium Reimbursement Plan, or PRP, Work?

All too often, employers simply cannot afford to offer health benefits. Some even resort to increasing wages in order to supplement employees who find their own individual plans. Unfortunately, this means both the employer and employee are unnecessarily paying thousands in taxes because the premiums are not paid with pre-tax dollars.

But IRS Section 125, allows employees to reimburse themselves for insurance policy premiums tax-free. Here’s how it works.

The Employer

  1. Creates the Plan
  2. Sets Eligibility
  3. Chooses the Start Date
  4. Enrolls Employees
  5. Sends Welcome Kits
  6. Pre-taxes Premium on Payroll

The Employee

  1. Chooses Monthly Pre-Tax Salary Reduction
  2. Purchases the Individual Policy
  3. Submits “claims” to get pre-tax

How PRPs Compare to Group Health Insurance

PRP vs Group Health

With PRPs, there is no minimum participation, and employers have no minimum contribution or administrative hassle. They are an excellent option for employers who don’t offer group health insurance because they can’t afford it, are too small, can’t meet participation requirements, or have employees in multiple states. 

An Example of Premium Reimbursement Plan

The Witchita Widget Company does not offer health insurance. John Smith, a long-time employee of the company, has been paying for individual health insurance on his own for years. John’s monthly insurance premium is $300 per month. He pays 30% of his salary in taxes.

Monthly Take Home Pay
Without PRP

Salary.......................................... $4,000
   

Taxable Salary............................ $4,000    

Taxes (30%)............................... -$1,200
   

Net take home pay...................... $2,800 

                       


Monthly Take Home Pay
with PRP

Salary.............................................. $4,000
Pre-tax PRP deduction………..……….. -$300

Taxable Salary ............................... $3,700

Taxes (30%)................................... -$1,110
Tax-free PRP addition……................ +$300

Net take home pay.......................... $2,890

By paying his insurance premiums pre-tax, John reduces his taxable income by $300 per month, saving $1,080 per year.

Administering Premium Reimbursement Plans

Premium Reimbursement Plans are subject to compliance with IRS, ERISA, and HIPAA rules and regulations. Employer-employee privacy must be maintained, and using a PRP Administrator makes compliance a breeze. A good PRP Administrator will have a paperless plan setup, seamless payroll integration, online claim submission, fast claim processing, and real-time notification through every step of the claims process.

PRPs By Another Name

The term “Premium Reimbursement Plan” is synonymous with many other terms, and can be used interchangeably with the following:

  • Premium Reimbursement Account (PRA)
  • Premium Reimbursement Arrangement (PRA)
  • Pre-Tax Premium Payment (PPP)
  • Section 125 Premium Only Plan
  • Premium Only Plan (POP)