As Health Reimbursement Plans (HRPs) grow in popularity as a way to contribute to employees’ individual health insurance policies, I often hear questions from small businesses about what they are and how they work under the Affordable Care Act. I also hear misconceptions. So, to help owners and managers understand how HRPs work, I’ve outlined 12 quick facts with links to learn more.
Understand these 12 facts and you’ll be well on your way to understanding the nuts and bolts of HRPs.
12 Facts on Health Reimbursement Plans (HRPs)
1. An HRP is a formal employer health plan (a group health plan). An employer sets up the benefit plan and provides a contribution to eligible employees’ healthcare expenses.
2. An HRP is not health insurance coverage. It is a reimbursement plan. With an HRP, employees purchase their own health insurance plan and are reimbursed for eligible expenses.
3. An HRP is 100% funded by the employer. Unlike HSAs or FSAs, employees may not contribute funds.
4. Employers may give the same contribution to all eligible employees, or offer different allowance amounts based on job function and/or family status.
5. Employees may use their HRP funds on personal health insurance expenses, and also basic preventive care. A lot of different types of health insurance qualify. See this list.
6. HRP funds are notional, meaning no funds are expensed until employees submit a reimbursement and verify their healthcare expense. As such, pre-funding of third party accounts is not required - a bonus for many small businesses.
7. HRPs are allowed under the Affordable Care Act, as long as they follow new and existing regulations. Because an HRP is a group health plan, there are federal rules the plan needs to follow. Compliance with these rules is easy with the right administration software. See this list of HRP compliance rules.
8. Setting up an HRP is fairly straight-forward, although there are important steps such as having plan documents and designing a compliant plan. There are online software services to help streamline plan set up and ensure compliance.
9. An HRP is a tax-free, and tax-deductible benefit. Although, tax benefits are limited for some business owners.
10. An HRP is different than a Health Reimbursement Arrangement (HRA). An HRP is specifically designed to comply with new health reform regulations. As such, it is more limited than the more well-known “stand-alone HRA.” For most employers, a stand-alone HRA is no longer a compliant way to reimburse individual health insurance premiums.
11. HRPs are allowed under Section 105 of the IRS tax code. Because of this, they are also commonly called Section 105 medical reimbursement plans or simply Section 105 Plans.
12. These days, an HRP is the primary vehicle employers are using for individual health insurance reimbursement. Read more about reimbursement plans available to small businesses.
When you look at a few basic facts, understanding an HRP is simple. To summarize, an HRP is a formal plan employers may use to provide employees tax-free reimbursement of individual health insurance premiums. HRPs are a powerful tool for small businesses who want to allow employees to have the benefits of modern individual health insurance and continue to (or start to) provide a contribution to their healthcare.
Did these twelve facts help you better understand HRPs? What questions do you have? Leave a comment below. If we get several questions, we’ll write a follow up post answering your questions!