There are several medical reimbursement plans available to employers - HRPs, HRAs, HSAs, FSAs, and POPs. The acronyms can be confusing, and so can the new health care reforms.
So, which reimbursement plans can be used for health insurance premiums?
This article provides a summary of different medical reimbursement plans including if, and how, they can be used for individual health insurance premiums.
An HRP is an employer-funded Section 105 medical reimbursement plan designed for health insurance reimbursement. To comply with the Affordable Care Act, HRPs are designed to reimburse eligible health insurance premiums and basic preventive services. Any unused funds stay with the employer, and there is no rollover of funds year to year.
Bottom line - HRPs allow reimbursement of individual health insurance premiums, including policies purchased on the Health Insurance Marketplace. Companies of any size may use an HRP, though tax benefits vary for business owners.
HRAs are employer-funded health benefit plans used to reimburse employees for eligible medical expenses, including health insurance premiums. With an HRA, the employer determines rollover settings, which medical expense categories are reimbursable, and employee eligibility criteria. As with an HRP, any unused funds stay with the employer.
In the past, HRAs were the go-to vehicle for tax-free reimbursement of health insurance. The Affordable Care Act, however, has limited how HRAs may be used. Currently, HRAs may reimburse individual health insurance in the following limited situations:
The HRA has one-participant, for example a C-Corp owner or one-person non-profit (a “One-Person Stand-alone HRA”)
The HRA is offered only to retirees (a “Retiree HRA”)
Bottom line - HRAs may only be used for individual health insurance reimbursement in limited situations.
An HSA is a financial account established by an individual to pay for qualified medical expenses. Once established, anyone may contribute to an HSA (employer, employee, or third party), although there is a maximum annual contribution of $3,350 for an individual and $6,650 for a family (2015). To qualify for an HSA, an individual must have a high deductible health plan that meets certain criteria. HSA funds roll over year to year.
An unknown fact about HSAs is that they may be used for health insurance premiums, but only in these limited situations:
Long-term care insurance
Health care continuation coverage (ex: COBRA)
Health care coverage while receiving unemployment compensation under federal or state law
Medicare and other health care coverage for those 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap)
Bottom line - HSAs may only be used to reimburse (or pay for) individual health insurance in limited situations.
FSAs are sponsored by employers, and are (usually) 100% employee-funded. FSAs are one way for employees to use pre-tax dollars to pay for medical expenses, but not for health insurance premiums.
The maximum annual election for FSAs is $2,550 (2015) and rollover of funds is limited to $500/year - if allowed by the employer.
Bottom line - FSAs may not be used to reimburse (or pay for) individual health insurance.
POPs are Section 125 “cafeteria plans” sponsored by employers that are 100% employee-funded. POPs are one way for employees to use pre-tax dollars to pay for health insurance premiums.
POPs may still be used for individual health insurance premiums, but they may not be used on subsidized, Marketplace health plans. As such, POPs are less common today.
Bottom line - POPs may be used by employees to reimburse themselves for individual health insurance purchased on the private market. An employer may not contribute to the POP.
Small businesses are looking for health benefit alternatives to help employees with their individually-purchased health insurance. One way to help is by setting up a medical reimbursement plan, such as a Healthcare Reimbursement Plan or HRP.
Have a question about how medical and health insurance reimbursement plans work? Download this free chart or leave a comment below.