Premium Reimbursement Arrangements Overview

Premium Reimbursement Arrangements are gaining popularity with small and medium-sized businesses because they offer a more affordable way to offer health benefits. By reimbursing employees for individual health insurance premiums, instead of contributing to a group health insurance plan, the business saves 20% to 60% on healthcare costs.

What is a Premium Reimbursement Arrangement?

A Premium Reimbursement Arrangement is an agreement for an employer to reimburse employees for their individual health insurance premium expenses.

The concept is simple. With a Premium Reimbursement Arrangement, the business offers employees a monthly healthcare allowance to use on individual health insurance – instead of contributing to a group health insurance plan.

This type of health insurance alternative is taking off because individual health insurance is now better, and less expensive, than group health insurance. Premium Reimbursement Arrangements give employers, and employees, all the advantages of health benefits without the cost or complication of group health insurance.

The sections outlined on our navigation bar provide more information about Premium Reimbursement Arrangements.

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Premium Reimbursement Arrangement Resources

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Health Reimbursement Report 2017

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The Comprehensive Guide to the Small Business HRA

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Pros and Cons of Premium Reimbursement Arrangements

Companies evaluating Premium Reimbursement Arrangements should consider these pros and cons. The pros and cons are broken down between the two main types of arrangements, as each has unique advantages and disadvantages.

Tax-Preferred Premium Reimbursement Arrangement - Pros and Cons

With a tax-preferred Premium Reimbursement Arrangement, all similarly situated employees are granted a fixed allowance amount to purchase individual health insurance, but only receive money if they actually purchase health insurance. Employees purchase their own individual health insurance policy and submit proof to their employer (or the employer's third-party provider). Employees receive monthly reimbursements up to their allowance amount, added to their paycheck tax-free.

Pros of a Premium Reimbursement Arrangement:Pros_cons_premiums_reimbursement

  • Employees must show expense before reimbursement

  • Feels like a real, structured Health Benefits program

  • Tax-free for employees (saving of 20% - 40%)

  • No payroll taxes for employers (savings of 7.65%)

Cons of a Premium Reimbursement Arrangement:

  • It is a group health plan

  • Employer must take steps ensure compliance with group plan rules *

* A tax-preferred Premium Reimbursement Arrangement is a group health plan, and is subject to compliance with IRS, ERISA, HIPAA, ACA Market Reforms, and other applicable rules. To make sure your arrangement is compliant, and to make compliance easy, use a Reimbursement Software Provider.

Tip: With this type of Premium Reimbursement Arrangement, the business only reimburses employees for eligible premium expenses, up to the amount of their allowance. With no annual renewal increases, no minimum contribution amounts, and no minimum participation requirements, the business is free to set and control all costs.

Taxable Health Insurance Stipend - Pros and Cons

With a health insurance stipend, all similarly situated employees receive a fixed, taxable stipend to purchase individual health insurance, whether or not they actually purchase health insurance. The employee's monthly contributions are typically added to his or her paycheck. At the end of the year, employees receive a form showing the amount of their stipend that they should report as income on their personal income tax return.

Pros of a Taxable Health Insurance Stipend:

  • Not a group health plan

  • No compliance issues

  • Very simple and easy administration (automatic payroll additions)

Cons of a Taxable Health Insurance Stipend:

  • Company is required to pay payroll tax on reimbursements (7.65%)

  • Employees must claim reimbursements as income (20% - 40%)

  • Employees receive money regardless if they use it toward a health insurance premium

Use Cases for Premium Reimbursement Arrangements

A Premium Reimbursement Arrangement is an agreement for an employer to reimburse employees for their individual health insurance premium expenses. This section discusses different types of Premium Reimbursement Arrangements and why they work.

Types of Premium Reimbursement Arrangements

There are two main types of Premium Reimbursement Arrangements.

  1. Tax-Preferred Premium Reimbursement Arrangement:The most common type of Premium Reimbursement Arrangement is a tax-preferred plan. With this approach, employers use a Section 105 Medical Reimbursement Plan to reimburse employees for their substantiated individual health insurance costs on a pre-tax basis. This type of plan is sometimes called aHealthcare Reimbursement Plan (HRP).
  2. Taxable Health Insurance Stipend:Employers may also set up a taxable Premium Reimbursement Arrangement. With this approach, employees are provided a monthly taxable stipend to purchase individual health insurance, and do not show proof as to whether or not they actually purchase health insurance.

Tip: In this guide, we are focusing on tax-preferred Premium Reimbursement Arrangements.

How Premium Reimbursement Arrangements Work

With a Premium Reimbursement Arrangement:

  • 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.

Why Premium Reimbursement Arrangements Work

Premium Reimbursement Arrangements are gaining widespread adoption because individual health insurance is now better, and less expensive, than group health insurance. Premium Reimbursement allows employers to offer better health benefits at a lower cost.

Employers and employees save money because, on average, individual health insurance costs up to 60% less than group health insurance. And, with individual health insurance, employees get to:

  • Pick the plan that best fits their needs, including the doctors, for about half the cost of an equivalent group plan.
  • Keep their individual health insurance policy for as long as they want, completely independent of employment.
  • Receive access to the federal premium tax credits. Families are eligible who earn less than $100,000 per year (or a single person earning less than $45,000 per year).

Premium Reimbursement Arrangements are also an attractive solution because:

  • Reimbursements can be tax-deductible to the employer, and employees can receive reimbursements tax-free.
  • The employer gains fiscal control and predictability over their health benefits budget.
  • There are no minimum or maximum contribution amounts, and no minimum participation requirements.

In the next section, we’ll discuss more pros and cons of Premium Reimbursement Arrangements.

Design Requirements for Premium Reimbursement Arrangements

A tax-preferred Premium Reimbursement Arrangement is a Section 105 group health plan. As such, it is subject to compliance with IRS, ERISA, HIPAA, ACA Market Reforms, and other applicable rules.

To comply with these rules and regulations, the arrangement is designed to reimburse:

  • Individual health insurance premiums up to a specified monthly allowance, and
  • Preventive care

Designing a Premium Reimbursement Arrangement

Designing a Premium Reimbursement Arrangement is easy. These three questions will help you customize a plan that achieves your employee health benefit goals, and meets your budget.

  1. When will the plan year start?

Your company will decide when your Premium Reimbursement Arrangement will start.

  1. What monthly allowance amounts will you provide?

You probably already have a budget in mind for health benefits. Within this budget, how will you divide up employees' monthly allowances?

You can provide the same monthly allowance amount to all employees, or you can provide different monthly allowances to different types of employees. This is also called employee classes. Classes must be based on bona-fide job criteria such as job title, location, etc. You can also vary the allowance amounts by family status (single, married, etc.) within an employee class.

For example, you could provide $300/month to Senior Programmers and $150/month to Administrative staff.

Following this example, you could add a layer of family status allowances. For the Senior Programmers you could provide $300/month to single participants, $350/month to married participants, and $400/month to married with children participants.

  1. When are employees eligible for the plan?

What criteria makes employees eligible to participate in the Premium Reimbursement Arrangement? For example, do they need to work a certain amount of hours weekly, have a certain job title, or be employed for a certain number of days? (Note: the maximum waiting period is 90 days). These criteria will set employee eligibility for the Premium Reimbursement Arrangement.

Compliance Requirements for Premium Reimbursement Arrangements

This section summarizes the key compliance rules when reimbursing employees tax-free for individual health insurance though a Premium Reimbursement Arrangement.

IRS Rules for Premium Reimbursement Arrangements

There are three IRS rules that tax-preferred Premium Reimbursement Arrangements must follow:

  1. 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.

  2. The IRS requires that employees submit proper documentation verifying their reimbursement request, and that supporting documentation is saved on file for ten years.

  3. The reimbursement plan must comply with IRS non-discrimination 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.

ACA Rules for Premium Reimbursement Arrangements

There are nine key ACA rules that apply to Premium Reimbursement Arrangements:Compliance_requirements_premium_reimbursement

  1. Annual Limit Compliance (PHS Act 2711)

  2. Preventive Care Compliance (PHS Act 2713)

  3. 90-Day Waiting Period Compliance

  4. Internal and External Claims Appeal Process

  5. Dependent Coverage for Adult Children up to Age 26

  6. Uniform Explanation of Coverage and Definitions

  7. Form 720 Comparative Effectiveness Research (CER) Fee

  8. Form 5500 Series Form (Annual Report)

  9. 60-Day Notice of Material Modification

ERISA Rules for Premium Reimbursement Arrangements

There are two ERISA rules for premium reimbursement plans:

  1. Self-insured medical reimbursement plans 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. The SPD is the primary vehicle for informing participants and beneficiaries about their rights and benefits under their employee benefit plans.

  2. The employer must not endorse specific individual health insurance policies or pay directly for them. The employer should not get involved in the purchase or selection of employee’s individual health insurance policies.

HIPAA Rules for Premium Reimbursement Arrangements

Self-insured medical reimbursement plans are governed by HIPAA Privacy Rules. In order to administer the reimbursement plan correctly, the entity processing employee reimbursement claims receives Protected Health Information (PHI) that is required to be held confidentially under HIPAA.

In order to comply with HIPAA, an employer should contract with a third-party processor (such as a premium reimbursement software provider) to review all reimbursement requests so the employer does not come in regular contact with PHI.

COBRA Rules for Premium Reimbursement Plans

Lastly, self-insured medical reimbursement plans with 20 or more participants are subject to COBRA. Employers must give terminated employees the option to continue their participation in the reimbursement plan for a period after termination, and may charge an employee up to 102% of the value of their allowance if COBRA is elected.

Implementation Strategies for Premium Reimbursement Arrangements

This section outlines how to set up and implement a Premium Reimbursement Arrangement.

How to Set Up a Premium Reimbursement Arrangement

There are three simple steps to set up a Premium Reimbursement Arrangement.

Step 1: Cancel Group Health Insurance

First, cancel the group health insurance plan (if one is offered). Most plans can be canceled at any time. When a plan is canceled, all those covered will be eligible for a special enrollment period for individual health insurance.

This means employees are eligible to purchase individual health insurance outside of the annual open enrollment period (ex: November 15, 2014 to February 15, 2015). Eligible employees will also be able to access premium tax credits.

Step 2: Set Up a Premium Reimbursement Arrangement

To set up a Premium Reimbursement Arrangement, first decide how much the business will contribute to employees’ health insurance expenses. Businesses can provide the same contribution amount (“allowance”) to all employees, or offer a different allowance amount by class of employee and/or family status.

Then, work with a Reimbursement Software Provider to set up a formal plan. You’ll have two options:

Taxable Health Care Allowance - With this approach, the business provides a taxable health insurance stipend.

Tax-free Premium Reimbursement Arrangement - With this approach, the business uses a Section 105 Medical Reimbursement Plan to reimburse employees for their substantiated individual health insurance costs on a pre-tax basis. This type of plan is sometimes called a Healthcare Reimbursement Plan (HRP).

Step 3: Educate Employees

Next, educate employees about how individual health insurance and premium  reimbursement works, and how it benefits employees and their families.

Step 4: Employees Purchase Individual Health Insurance

Lastly, employees purchase individual health insurance policies with their own money and submit a reimbursement request. The business reimburses employees on payroll.

With a tax-preferred Premium Reimbursement Arrangement, the business only reimburses employees for eligible premium expenses, up to the amount of their healthcare allowance. Without annual renewal increases or minimum contribution amounts, the business is free to set and control all costs.

Administration Software for a Premium Reimbursement Arrangement

Premium Reimbursement Arrangements are an alternative to traditional employer-sponsored health benefits, allowing companies to reimburse employees for individual health insurance. Employers use a Premium Reimbursement Administration Software to stay compliant, and to make administration easy.

1. Employee Education & On-Boarding

While this first feature isn’t entirely a "software" feature, it is one of the most important considerations of offering a Premium Reimbursement Arrangement: employee education and company on-boarding. The Premium Reimbursement Administration Software should provide you a toolkit to help your company:

  • Understand the benefit (What is premium reimbursement? How does it work?)
  • Understand the benefits of individual health insurance
  • Learn how to request reimbursement and use their participant portal

2. Employee Allowances

The Premium Reimbursement Administration Software should allow you to give employees allowances monthly or at any time on an exception basis—with automatic monitoring of HIPAA and ERISA discrimination compliance rules. Deferred allowances (a waiting period) should be possible for new hires, and suspended allowances should be allowed for former employees that employers hope to re-hire on a seasonal basis.

3. Reimbursement Request Submission

Employees should be able to submit requests for reimbursement online, by fax, or by mail, and immediately receive an email acknowledging their request and providing an online link to monitor status. Documentation should be permanently available online for convenient access by employees.

4. Reimbursement Processing

The Premium Reimbursement Software Administration provider should process requests within 24 hours and employees should be able to inquire about their request via online chat, email, fax, mail, or telephone. No request should be rejected for improper or incomplete submission without multiple contacts. All employee contact should leave clear audit trails and meet appropriate regulatory guidelines (e.g. ACA, IRS, HIPAA, ERISA, and SAS 70). Look for software that provides “real-time” tracking of requests, available online 24/7.

5. Reimbursement Requests

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

6. Employee Ledger  

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

7. Integrated Electronic Plan Documents, SPD, and Employee Signature

The Plan Document, Summary of Benefits and Coverage (SBC), and 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.

8. Classes of Employees

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

9. Employee Enrollment & Termination

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.

10. Plan Setup

Employers should be able to completely set up and/or change both their premium reimbursement Health Plan and their Plan Documents simultaneously online.

11. Reporting

Employers should be able to view all reimbursements by employee or by Class of employees, and monitor in real-time claim information for each Class of employees. Employees should be able to see 3-5 prior years of history.

12. 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 plan participants (e.g. independent contractors, owners of Sub S companies) should receive appropriate 1099 information.

13. Personal Health Insurance Distribution          

Premium Reimbursement Software should automatically provide the employer’s health insurance broker a CRM (Customer Relationship Manager) to best serve their employees—including automatic notification to the broker when an employee’s premium reimbursement plan status changes due to family additions, promotions, etc.

14. HIPAA and ERISA Compliance

The employer should be automatically protected and the plan 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 Premium Reimbursement Arrangements

This section answers frequently asked questions (FAQs) about Premium Reimbursement Arrangements.

What is a Premium Reimbursement Arrangement?Questions_premim_reimbursement_arrangement

A Premium Reimbursement Arrangement allows companies to reimburse employees for individual health insurance premiums, as an alternative to group health insurance.

How does a Premium Reimbursement Arrangement work?

With a Premium Reimbursement Arrangement:

  • 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 Premium Reimbursement Arrangement Structured?

A tax-preferred Premium Reimbursement Arrangement 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 Premium Reimbursement Arrangement?

With the right Administration Software, a Premium Reimbursement Arrangement 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 Premium Reimbursement Arrangement 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 Premium Reimbursement Arrangement health insurance?

No. A tax-preferred Premium Reimbursement Arrangement is not health insurance. It is a Self-insured Medical Reimbursement Plan, allowed by Section 105 of the IRS code.

What type of healthcare expenses are reimbursable through a Premium Reimbursement Arrangement?

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

Is there a minimum or maximum number of participants that must enroll in a Premium Reimbursement Arrangement?

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

Do you have additional questions? Contact us. We’d be happy to help.

Additional Reading on Premium Reimbursement Arrangement

The Do's and Don'ts of Premium Reimbursement

Employers can provide reimbursement for premiums, however they should set up a formal plan and be aware of the do's and don'ts. We'll cover this and other best practices for Premium Reimbursement. >> Read more.

How to Calculate Cost Savings: Group Health Insurance vs. Premium Reimbursement

As small and medium sized employers evaluate health benefits, they consider two main approaches: group health insurance or reimburse employees for individual health insurance (aka premium reimbursement). One of the key decision-making factors is cost. This article outlines five steps to calculate the cost savings of group health insurance vs. premium reimbursement. >> Read more.

Infographic - How to Set Up a Premium Reimbursement Program

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Whiteboard Session - Premium Reimbursement [Video]

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Why Premium Reimbursement for Individual Health Insurance Is About to Explode

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Why Use Premium Reimbursement Software?

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The ACA Rules for Premium Reimbursement Plans

A common question is how the Affordable Care Act (ACA) impacts these types of healthcare reimbursement plans. This article examines ACA rules for premium reimbursement plans. >> Read more.

The IRS Rules for Premium Reimbursement Plans

This article examines the IRS rules for these types of tax-preferred premium reimbursement plans.  >> Read more.

The 4 Key Tax Codes That Allow Tax-Preferred Premium Reimbursement

As businesses transition to premium reimbursement plans, it is important to understand the four key Internal Revenue Code (IRC) sections that allow for tax-preferred premium reimbursement. >> Read more.

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