Health Reimbursement Plan Overview

A Health Reimbursement Plan (HRP) is a type of Medical Reimbursement Plan designed for individual health insurance reimbursement. Employers often use a Health Reimbursement Plan as the foundation of defined contribution health benefits . A Health Reimbursement Plan is similar to a business expense account for personal health insurance.

What is a Health Reimbursement Plan?

A Health Reimbursement Plan is an employer-funded, tax-advantaged benefit designed to reimburse employees for individual health insurance premiums.

A Health Reimbursement Plan is not considered health insurance. Rather, it is a way to provide allowances for individual health insurance reimbursement.

Health Reimbursement Plans are a type of Section 105 Self-Insured Medical Reimbursement Plan, and are commonly referred to as HRPs or Healthcare Reimbursement Plans.

The sections outlined on our navigation bar provide more information about Health Reimbursement Plans including how they are used, pros and cons, design and compliance considerations, and FAQs.

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Health Reimbursement Plan Resources

How the QSEHRA Works for Employees

In this eBook, we go over exactly how the QSEHRA applies to employees no matter their current insurance situation.

Health Reimbursement Report 2017

Download this report to see charts showing data for industry, family status, region to see if a QSEHRA will work for you.

The Comprehensive Guide to the Small Business HRA

Everything you need to know about the new QSEHRA. Including cost comparisons, case studies, and other tools.

Stay Informed

Pros and Cons of a HRP

When evaluating Health Reimbursement Plans, there are pros and cons to consider for your company and employees. This section outlines pros and cons of Health Reimbursement Plans.

Health Reimbursement Plan - Pros

Health Reimbursement Plans offer several advantages to both the employer and the employees.

  1. Cost Control: With Health Reimbursement Plans, the company sets and controls the cost of health benefits. Unlike traditional group health insurance, there are no minimum contribution amounts. Additionally, the company owns the allowance funds and the benefits are entirely employer-funded. Reimbursements are only issued to employees once they show proof of their expense. And, when the employee leaves the business, any unused funds generally stay with the business.
  2. Cost Savings: Individual health insurance plans, on average, cost 20% - 60% less than group health insurance plans. Eligible employees are able to access discounts on their health insurance with the federal premium tax credits. And as an additional cost savings to employees, reimbursements are generally excluded from employees' gross income.
  3. More Time: Health Reimbursement Plans reduce the administration time of health benefits. Using the right Administration Software, managing health benefits takes 5 minutes per month online.
  4. Tax Savings: By using a tax-preferred Health Reimbursement Plan, the company realizes tax savings. Employers can deduct reimbursements as a business expense, and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%).
  5. Recruiting Retention: Many small businesses struggle to afford group health insurance, or cannot meet participation requirements. Offering a Health Reimbursement Plan allows companies to offer (and advertise) health benefits when recruiting key employees. It also shows employees that the business cares about employees' healthcare.
  6. Choice of Any Insurance Plan: With Healthcare Reimbursement Plans, employees choose the individual health insurance plan best for them, including which network of doctors. Employees can choose from any carrier, and any type of plan (HMO, PPO, HDHP, etc.). Employees can purchase a plan through the new Health Insurance Marketplaces, through a broker, or directly from an insurance company.
  7. Insurance Plan Portability: Employees are purchasing individual health insurance plans. Since individual health insurance plans belong to the employee (not to the small business), the plan stays with employees if they leave the business.

Health Reimbursement Plan - Cons

The cons of Health Reimbursement Plans and individual health insurance reimbursement are:

  1. Change in Benefits Administration: Offering a Health Reimbursement Plan is a different approach for some employers and employees. As such, some employers perceive administration as a con of offering a Health Reimbursement Plan. With the wrong administrator this can be true. What's the workaround? Use an online administration software to alleviate this. With the right HRP software, administration takes 5-10 minutes a month.
  2. Limited Tax Benefits for Some Owners: Some types of business owners receive limited tax benefits from reimbursements. Read more on owner participation in Section 105 Plans, including HRPs.
  3. Employer Must Comply to Avoid Costly Fines: A Health Reimbursement Plan is a group health plan and it is subject to compliance with IRS, ERISA, HIPAA, ACA Market Reforms, and other applicable rules. As such, some employers perceive compliance as a con. To make sure your arrangement is compliant, and to make compliance easy, use a software administrator.

Use Cases to Understand Health Reimbursement Plans

This section provides an overview of how Health Reimbursement Plans are structured and used.

How Health Reimbursement Plans (HRPs) are Structured

A Health Reimbursement Plan (HRP) is designed for individual health insurance reimbursement. It is also designed to comply with all applicable regulations.

As such, a Health Reimbursement Plan is structured to reimburse employees for:

  • health insurance premiums up to a specified monthly healthcare allowance, and
  • unlimited preventive care with no cost sharing.

Read more about Health Reimbursement Plan design requirements.

Health Reimbursement Plans (HRPs) are Notional

A Health Reimbursement Plan (HRP) is simply an agreement between the employer and employees. As such, an HRP is a notional arrangement where no funds are expensed until reimbursements are paid. Through an HRP, employers reimburse employees directly only after the employees incur an approved healthcare expense.

Health Reimbursement Plans (HRPs) Have No Contribution Limits

Unlike a Health Savings Account (HSA) or a Flexible Spending Accounts (FSA) , there is no limit to the amount of money an employer can contribute to an employee’s HRP. There is also no minimum contribution amount.

Health Reimbursement Plans (HRPs) are Not Health Reimbursement Arrangements (HRAs)

HRPs and Health Reimbursement Arrangements (HRAs) are both types of Section 105 plans, but a key distinction between an HRP and an HRA is that an HRP does not impose a plan-wide maximum annual benefit and does not allow annual roll-over. For some employers, a stand-alone HRA is no longer a compliant vehicle for premium reimbursement because of the new Affordable Care Act "Market Reforms."

Health Reimbursement Plan Design Requirements

In this section we will cover design requirements for Health Reimbursement Plans (HRPs).

A Health Reimbursement Plan (HRP) is designed for individual health insurance reimbursement.

Because of the Affordable Care Act's new "market reforms," an HRP is structured to reimburse employees for:

  • health insurance premiums up to a specified monthly healthcare allowance, and

  • unlimited preventive care with no cost sharing.

To help limit the preventive care liability, an employer could require employees to show proof of having non-grandfathered minimum essential coverage to be eligible for the HRP. That way, the employee receives 100% preventive care services via their own health insurance plan.

Designing a Health Reimbursement Planhealth_reimbursement_plan_design_requirements

Designing a Health Reimbursement Plan is simple. Here are questions to ask as you design a Health Reimbursement Plan:

  • When will the HRP plan start?

  • What monthly healthcare allowance will we provide? Will we provide the same allowance to all employees, or offer different allowances based on employee class or family status?

  • What makes employees eligible for the benefit?

  • Who will administer the HRP?

  • Do we understand the compliance rules with the HRP?

Compliance Requirements for a Health Reimbursement Plan

Health Reimbursement Plans (HRPs) are Section 105 group health plans. As such, they must comply with IRS rules, HIPAA, COBRA, ERISA, and the Affordable Care Act (ACA). This section details these compliance requirements. Compliance_requirements_health_reimbursement_plan

IRS

  • Plan Documents: The IRS requires that written Plan Documents are established and maintained. Plan Documents define what expenses are eligible for reimbursement, the amount of employer contribution, and other required details about the reimbursement plan.

  • Documentation: The IRS requires that employees submit proper documentation verifying their claim for reimbursement, and that supporting documentation is saved on file for ten years.

  • Non-Discrimination: HRPs must comply with IRS nondiscrimination rules. The rules state the plan must not discriminate in favor of highly compensated individuals (HCIs) with respect to eligibility to participate in the plan or benefits provided under the plan.

HIPAA

  • HIPAA Privacy Rules : HRPs are governed by HIPAA Privacy Rules. In order to administer an HRP correctly, the entity processing employee reimbursement claims receives Protected Health Information (PHI) that is required to be held confidentially under HIPAA.

COBRA (Only for plans with 20 or more participants)

  • COBRA Compliance: Employers must give terminated employees the option to continue their participation in the HRP for a period after termination, and may charge an employee up to 102% of the value of their allowance if COBRA is elected.

ERISA

  • Summary Plan Description: HRPs are employee welfare plans under ERISA. ERISA requires every [welfare] plan to have a Summary Plan Description (SPD) and to furnish copies to each participant.

  • ERISA Compliance: The U.S. federal government has specific regulations employers must comply with in order to reimburse employees for individual health insurance premiums without triggering ERISA plan status for the individual health insurance policies. For example, the employer must not endorse specific individual health insurance policies or pay directly for them.

Affordable Care Act (ACA)

  • Annual Limit Compliance: Section 2711 of the Public Health Services (“PHS”) Act, as added by the ACA, provides that no annual or lifetime limits may be placed on essential health benefits (“EHB”). PHS Act 2711 provides that annual limits and lifetime limits may be placed on benefits that are not EHB, such as health insurance premiums. As such, HRPs are designed to only reimburse individual health insurance premiums up to a specified monthly healthcare allowance, and basic preventive health services as required by PHS Act Section 2713 (discussed next).

  • Preventive Care Compliance: Section 2713 of the PHS Act, as added by the ACA, requires group health plans (including HRPs) to cover basic preventive health services without cost-sharing.

  • 90-Day Waiting Period Compliance: The ACA prohibits waiting periods over 90 days for eligible employees.

  • Internal and External Claims Appeal Process: The ACA added new requirements to the internal and external appeal process including how and when procedures are communicated to plan participants.

  • Dependent Coverage for Adult Children up to Age 26: Section 2714 of the PHS Act, as added by the ACA, provides that group health plans (including HRPs) that make available dependent coverage of children must make such coverage available for children until 26 years of age.

  • Uniform Explanation of Coverage and Definitions: The ACA requires that group health plans, participants, and beneficiaries receive a standardized summary of benefits and coverage (“SBC”) and a set of uniform definitions (“Uniform Glossary”), both of which must conform to requirements outlined in the ACA and existing regulations.

  • Form 720 Comparative Effectiveness Research (CER) Fee: The ACA includes a "research fee" that plan sponsors must pay on an annual basis annually via Form 720.

  • 60-Day Notice of Material Modification: The ACA requires employers to provide 60 days advanced notice to participants when making material modifications to their group health plan (including HRPs).

Health Reimbursement Plan Implementation Strategies

This section outlines how to implement a Health Reimbursement Plan.

How to Set up a Health Reimbursement Plan

There are six steps to consider as you set up and implement a Health Reimbursement Plan (HRP):

Step 1 - The employer decides who will administer the HRP (ex: Administration Software Provider, a third-party administrator, or self-administer).

Step 2 - The employer sets employee eligibility requirements and determines the monthly allowance amounts.

Step 3 - The employer enrolls eligible employees into the plan and distributes all required plan documents.

Step 4 - Employees purchase health insurance with their own money, and submit documentation for reimbursement.

Step 5 - A HIPAA-compliant claims processor reviews the reimbursement request and approves or rejects the request. ( Tip: Unlike with an HSA, the IRS requires employees to submit written documentation for all eligible medical expenses before they are reimbursed from an HRP. However, because of HIPAA and other privacy concerns, virtually all companies use a third-party to handle verification of medical expenses and/or reimbursement to employees.)

Step 6 - If the request is approved, the employer reimburses the employee for the approved reimbursement, up to the balance of each employee's HRP.

How to Administer a Health Reimbursement Plan

To administer a Health Reimbursement Plan (HRP), you need to:

  • Have legal, written HRP Plan Documents, and
  • Have safeguards in place to stay compliant with the IRS, ERISA, HIPAA, and the ACA.

Businesses have three main options for compliant HRP administration: a traditional third party administrator ("TPA"), an Administration Software provider, or self-administration. Because of compliance reasons, and for ease of use and time savings, most businesses use a third party to administer the plan.

  1. A Traditional TPA will help a business: set up the HRP, create and distribute plan documents, manage all funds, review claims for reimbursement, keep premium documentation on file, and issue reimbursements to employees. Traditional TPAs require pre-funding of the HRP allowances.
  1. An HRP Administration Software helps a business: set up the HRP, create and distribute plans documents electronically, provide a "Quick Books-like" tracking of HRP funds, review claims for reimbursement, keep medical receipts on file electronically, and notify the employer (through the software) when to reimburse employees via payroll. HRP Software does not require pre-funding of allowances, and is not a fiduciary.
  1. Self-Administration: Technically, a business can self-administer its own HRP, but failure to comply with the minimum federal administration requirements is common without utilizing proper Software or a TPA. Businesses that self-administer are frequently out of compliance with IRS, ERISA, HIPAA, COBRA, and ACA regulations, and businesses can face costly fines for being out of compliance. And, if a business puts into place all of the safeguards needed for compliance, the administrative cost likely outweighs the benefits of the HRP.

In the next section, we’ll cover more about HRP Administration Software.

Administration Software for a Health Reimbursement Plan

HRP Administration Software provides flexibility in plan design, ensures compliance, and makes administration easy for both the employer and employees.

This section outlines 13 features to look for with HRP Administration Software.

(1) Employee Healthcare Allowances

Employers should be able to give employees allowances with automatic monitoring of HIPAA and ERISA discrimination compliance rules. Deferred allowances should be possible for new hires, and suspended HRPs should be allowed for former employees that employers hope to re-hire on a seasonal basis.

(2) Reimbursement Requests

Employees should be able to submit reimbursement requests online, via fax, or mail, and immediately receive an email acknowledging their claim and providing an online link to monitor claim status. Premium documentation should be permanently available online for the convenience of employees desiring such access to copies of invoices, etc.

(3) Reimbursement Request Processing

Reimbursement requests should be processed within 24 hours and employees should be able to inquire about their claim via online chat, email, fax, mail or telephone. No request should be rejected for improper submission without multiple contacts from their Plan Supervisor. All employee contact should leave clear audit trails and meet appropriate regulatory guidelines (e.g. IRS, HIPAA, ERISA, SAS 70).

(4) Reimbursement Tracking

Employees should receive email notification when their reimbursement request is approved and again confirming when (and how) it is reimbursed. Reimbursement should be administered individually or on a batch periodic basis via check, payroll addition, or direct deposit leaving a clear and permanently-available audit trail.

(5) Employee Ledger

All employees should have access to an online ledger showing their current HRP balance, allowances, claims, and reimbursements including permanent storage of receipts, relevant tax information, and the ability to save or export their own medical information via the administration platform.

(6) Integrated Electronic HRP Plan Documents, SPD, and Employee Signature

The HRP Plan Document and HRP SPD (Summary Plan Description) should be electronically created, readily accessible online, and signatures should be collected electronically. Employers should be able to administer a change to benefits for any specific Class of Employees at any time and the electronic documents should automatically change and, where required, new electronic signatures should be collected when the employee is next online.

(7) Classes of Employees

Employers should be able to instantly create online unlimited different Classes of Employees with each Class receiving different benefits by employee family status.

(8) Employee Enrollment

Employers should be able to instantly enroll or remove employees in real-time on an individual or batch basis, with automatic printing of employee Welcome Kits and other appropriate plan administration information.

(9) Plan Setup

Employers should be able to completely set up and/or change both their HRP plan and their Plan Documents simultaneously online.

(10) Reporting

Employers should be able to view all reimbursements by employee or by Class of Employees, and monitor in real-time de-identified Claim information for each Class of Employees by Category of Expense. Employees should be able to see 3-5 prior years of HRP expenses broken down by categories of expense.

(11) HRP Tax Forms and Information

All information for required administration reporting (e.g. 5500 for employers with more than 100 employees) should be available online in real time, and non-eligible HRP participants (e.g. independent contractors, owners of Sub S companies) should receive appropriate 1099 information.

(12) Personal Health Insurance Distribution

The Software should have helpful resources for employees on personal health insurance. Additionally, look for Software that automatically provide their health insurer(s) a CRM (Customer Relationship Manager) to best serve their employees—including automatic notification to insurer(s) when an employee’s plan status changes due to family additions, promotions, etc.

(13) HIPAA and ERISA Compliance

The Employer should be automatically protected and the HRP administration made HIPAA Compliant through technology rather than the training of administering employees. For example, employers should not be able to view HIPAA-protected employee information, and should automatically follow Department of Labor HIPAA and ERISA guidelines for employers allowing insurers access to their employees.

Frequently Asked Questions about Health Reimbursement Plans

This section answers frequently asked questions (FAQs) about Health Reimbursement Plans.

What is a Health Reimbursement Plan?

A Health Reimbursement Plan allows companies to reimburse employees tax-free for individual health insurance premiums.

How does a Health Reimbursement Plan work?

With a Health Reimbursement Plan:

  • The company sets monthly healthcare allowances.
  • Employees purchase their own health plan.
  • Employees submit a reimbursement request.
  • One the request is approved, the company reimburses employees for the approved expense via payroll, check, or direct deposit.

How is a Health Reimbursement Plan Structured?

A Health Reimbursement Plan is a Section 105 Self-insured Medical Reimbursement Plan. It is structured to reimburse employees for health insurance premiums up to a specified monthly healthcare allowance, and basic preventive health services as required by Public Health Services (“PHS”) Act Section 2713.

How much time does it take the company to administer a Health Reimbursement Plan?

With the right Administration Software, an HRP takes less than 5 minutes per month to administer online. Companies use the software to add approved reimbursements to payroll. There are no time-consuming annual renewals, and employees maintain a direct relationship with the insurance company of their choice.

How does a Health Reimbursement Plan work for employees?

Employees select and purchase an individual health policy that best fits their families' needs, choosing any plan, from any carrier.

Employees submit a reimbursement request for their premium expense, and are reimbursed up to the amount available in their balance. Employees can keep their same network and doctors, and pick a coverage level that fits their health needs. Individual health plans cost 20% - 60% less than traditional group plans, and tax credits may be available to qualifying employees.

Is a Health Reimbursement Plan health insurance?

No. A Health Reimbursement Plan is not health insurance. A HRP is a Self-insured Medical Reimbursement Plan, allowed by Section 105 of the IRS code.

What type of healthcare expenses are reimbursable through ZaneHealth?

Healthcare expenses that may be reimbursed through a Health Reimbursement Plan include qualified health insurance premiums and basic preventive health services.

Is there a minimum or maximum number of participants that must enroll in a Health Reimbursement Plan?

No. Companies of all sizes can use a Health Reimbursement Plan. Additionally, there are no required minimum participation requirements, and the company determines the eligibility requirements during implementation.

Additional questions on Health Reimbursement Plans? Contact us. We’d be happy to help.

Additional Reading on Health Reimbursement Plans

How Healthcare Reimbursement Plans (HRPs) Work With New "Market Reforms"

This article outlines how Healthcare Reimbursement Plans comply with the new Affordable Care Act “Market Reforms.” >> Read more.

FAQ: Can I have an HRP and an HSA at the same time?

Employers, agents, financial professionals, and employees often have questions about Health Savings Accounts (HSAs), and how they work with a Defined Contribution Health Plan, such as a Healthcare Reimbursement Plan (HRP). A common question we receive is "Can an employee have an HRP and HSA at the same time?" The answer is: "Absolutely, yes!" >> Read more.

Who Can Administer a Healthcare Reimbursement Plan?

Healthcare Reimbursement Plans provide small and medium sized businesses an affordable health benefits solution. A common question from business owners, HR professionals, CPAs, and brokers is "who can administer the Healthcare Reimbursement Plan?" >> Read more.

HSAs vs. HRPs (Savings Accounts vs. Reimbursement Plans)

Which is better: A Healthcare Reimbursement Plan (HRP) or a Health Savings Account (HSA)? The answer depends on what you are trying to accomplish and whether you are an employer or an employee. For most employers HRPs are superior to HSAs. >> Read more.

Individual Health Insurance Reimbursement - An Overview

Under the Affordable Care Act, small businesses (<50 employees) aren't required to offer health insurance, but most want to. And, there are new advantages of individual health insurance such as the premium tax credits and guaranteed-issue coverage. All of these factors leave small business owners looking to invest their health benefit dollars in individual health insurance reimbursement. >> Read more.

The Comprehensive Guide to the Small Business HRA