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Small Business Employee Benefits and HR Blog

Small Business 101 - How to Reimburse Employees for Medical Expenses

As leadership teams evaluate small business health insurance options, a commonSmall Business 101 - How to Reimburse Employees for Medical Expenses question we receive is, “How can we reimburse employees tax-free for medical expenses?” There are four main medical expense reimbursement plan options. To help clarify which type of plan will help your small business achieve its goals, here is a simple breakdown of four primary medical reimbursement accounts used by small businesses today.

In this article, we’ll cover:

  • Health Savings Accounts (HSAs)
  • Health Reimbursement Arrangements (HRAs)
  • Healthcare Reimbursement Plans (HRPs)
  • Flexible Spending Accounts (FSAs)

Health Savings Accounts (HSAs)

An HSA is an individual bank account owned by an employee that allows for tax-free payment or reimbursement of eligible medical expenses.

While HSAs are often known as "company benefits" - offered alongside a company-sponsored high-deductible health plan - they are really more like IRAs because individuals can set them up and contribute to them on their own.

We talk a lot about HSAs over in this article, but for a “101” summary, here are the key HSA features:

  • Eligible medical expenses include unreimbursed medical care (as defined by the IRS) and insurance premiums only for unemployed individuals.
  • Must have a high-deductible health plan to open an HSA.
  • Employee owned and portable after termination.
  • Anyone may contribute (company, employee, etc.).
  • There are annual contribution limits ($3,350/year for single and $6,750/year for family in 2016).

Health Reimbursement Arrangements (HRAs)

An HRA is an employer-funded health plan used to reimburse employees for out of pocket medical expenses.

HRAs are used in one of two ways, 1) the employer offers an Integrated HRA, paired with a high-deductible health insurance plan. Or, 2) the employer offers a stand-alone HRA that employees may use on a variety of medical expenses - including health insurance premiums.

Stand-alone HRAs, however, are much less common today as health reforms have placed limitations on the use of stand-alone HRAs for most companies. If a company wants to reimburse for individual health insurance premiums, they often set up a limited-purpose Healthcare Reimbursement Plan - which we’ll discuss more below.

For a detailed review of HRAs, see this article. To summarize:

  • Eligible medical expenses include unreimbursed medical care and health insurance premiums (as defined by the IRS) - though the company may limit categories to reimburse in the plan documents.
  • Company owned and funded. Employees generally do not have access to funds after termination.
  • No annual contribution requirements.

Healthcare Reimbursement Plan (HRP)

An HRP is a type of medical reimbursement plan designed for premium reimbursement. An HRP is funded and owned by the company. Employees may use their allowance to reimburse themselves for qualified individual and family health insurance premiums. HRPs are often the foundation of a premium reimbursement program or defined contribution health benefits, and can be designed to comply with health reform's new Market Reforms.

For a detailed discussion of HRPs, see this article. Here is a summary of HRP features:

  • Eligible medical expenses include eligible health insurance premiums and preventive care (as defined by the IRS).
  • Company owned and funded. Employees generally do not have access to funds after termination.
  • No annual contribution requirements.

Health Flexible Spending Accounts (FSAs)

Health FSAs offer a tax-free way for employees to save for qualified medical expenses during a single year. FSAs can be paired with any health plan or used alone. Funds expire if not used by the plan year-end.

For a detailed discussion of FSAs, see this article. Here is a summary of FSA features:

  • Eligible medical expenses include out-of-pocket medical expenses (as defined by the IRS), excluding insurance premiums.
  • Must be established by a company.
  • Can be funded by employees or the company.
  • Maximum annual contribution limit $2,500 per employee.

Conclusion

If your small business is looking to reimburse employees for medical expenses, there are four main types of reimbursement plans to evaluate: HSAs, HRAs, HRPs, and FSAs. Which is the right plan? The answer depends on a few factors such as what type of expenses the company would like to reimburse, how much the company wants to contribute (if any), and flexibility of the plan for the company and employees.

To see how the four types of plans compare, here is a quick and easy to read comparison chart (free PDF download).

What questions do you have about how to reimburse employees for medical expenses? We’d love to hear from you. Leave a comment or question below.  

Learn the differences between HSAs, HRAs, and FSAs