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We've updated one of our most popular materials. See what's new in our guide to MERPs.

A Guide to Premium Reimbursement Arrangements

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

The Comprehensive Guide to the Small Business HRA