Benefit Funding Strategies

Introduction to Healthcare Reimbursement Plans (HRPs)

A Healthcare Reimbursement Plan (HRP) is an employer-funded, tax advantaged employer health benefit plan that can reimburse employees for individual health insurance premiums.

An HRP is not considered health insurance. Rather, it is a way to provide allowances for individual health insurance. Using the HRP, the employer makes contributions to an employee's allowance. Then, the HRP provides reimbursement for eligible healthcare expenses.

How Healthcare Reimbursement Plans (HRPs) are Structured

A Healthcare Reimbursement Plan (HRP) is designed for premium 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.

Healthcare Reimbursement Plans (HRPs)

A Healthcare Reimbursement Plan (HRP) is simply an agreement between the employer and employees. In other words, 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 expenses.

Healthcare 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.

Healthcare 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".

Section 105 Plans

Section 105 Plans Overview

What is a Section 105 Plan?

A Section 105 Plan allows tax-free reimbursement of medical and insurance expenses, as allowed under Section 105 of the Internal Revenue Code (IRC).

Section 105 Plans are used by employers in a variety of ways. For example, a common type of Section 105 Plan is a self-funded (or self-insured) health plan, where the employer self-funds (or self-insures) health benefits rather than pay premiums to an insurance company.

Section 105 Plans are also frequently found in the form of Medical Reimbursement Plans such as Health Reimbursement Arrangements and Health Reimbursement Plans

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

More and more, businesses are setting up self-insured medical reimbursement plans to reimburse employees tax-free for individual health insurance. As businesses transition to these types of premium reimbursement plans, it is important to understand the four key Internal Revenue Code (IRC) sections that allow for tax-preferred premium reimbursement.

Self-Insured Medical Reimbursement Plans are a Tax-Free Employee Benefit

A self-insured medical reimbursement plan is a group health plan and is a tax-free employee benefit as outlined in Internal Revenue Section 105. When used for premium reimbursement, it is also called a Healthcare Reimbursement Plan (HRP)or Section 105 Medical Reimbursement Plan.

For employers, this means reimbursements are tax-deductible as a business expense, the same way as premiums paid for a group insurance policy or other benefits expenses.

For employees, reimbursements are not included in employees’ income and thus not subject to any income or payroll tax withholding. However, the tax-free nature of reimbursements received by proprietors, partners, and some S-Corp shareholders may be limited.

4 Key Sections of the Internal Revenue Code

There are four key sections of the IRC that allow tax-preferred premium reimbursement via a self-insured medical reimbursement plan.

  1. IRC Section 105: Section 105 allows tax-free reimbursements from a self-insured medical reimbursement plan if the reimbursements are for expenses incurred for “medical care” as defined in Section 213(d).
  2. IRC Section 213: Section 213(d) defines “medical care” for personal deduction and Section 105 distributions, which includes amounts paid for insurance.
  3. IRC Section 106: Section 106 allows the value of the self-insured medical reimbursement plan to be tax-free to employees.
  4. IRC Section 162: Section 162 allows reimbursements to be tax-deductible to the employer as a business expense.

FAQ - How Has the Affordable Care Act Changed Tax-Preferred Premium Reimbursement?

The Affordable Care Act introduced new rules and regulations that group health plans must follow, such annual limit compliance (PHS 2711) and preventive care compliance (PHS 2713). As such, self-insured medical reimbursement plans used for premium reimbursement must be designed to comply with these ACA rules (as well as ERISA, HIPAA, COBRA, etc).

Regarding the tax-preffered treatment, however, nothing has changed. The tax code still allows tax-free reimbursement of individual health insurance via IRC Section 105 and IRC Section 213.