As a business owner, you know that what you offer for employee health insurance can attract top talent to your organization. You also struggle with the reality that contributing to the cost of such coverage may not be in your budget this year, especially if you don’t have enough employees to obtain group discount rates.
The Internal Revenue Service (IRS) recognizes employee health insurance is a significant issue in small business and provides business owners with three possible solutions that we discuss below. Keep in mind that these are only three options, and they might not work for your California business. Additionally, the IRS considers any other method of providing reimbursement for employee health insurance taxable income that employees must report on their income tax filing for 2019.
Health Savings Account (HSA)
Signed into law by President George W. Bush on December 2003, the HSA account is perhaps one of the best-known types of employee reimbursement accounts for healthcare expenses. The HSA came about as a response to people expressing concerns about affording the cost of healthcare under high-deductible insurance plans. With an HSA account, both the employer and employee can contribute funds towards healthcare expenses on a pre-tax basis. In 2019, the maximum contribution is $3,500 per year for a single person and $7,000 per year for family coverage. People over age 55 can contribute an additional $1,000 per year.
The IRS doesn’t consider employer contributions to an HSA account as taxable income. Money in the account can go towards insurance premiums, co-pays, deductibles, or any other qualifying out-of-pocket healthcare expense the employee incurs. Employees don’t lose the money if they don’t use it by the end of the year or if they leave your company. However, employees do need to pay income tax on any portion that you contributed as the employer only if they don’t use it to cover healthcare expenses. The HSA option is only available with high-deductible employee health insurance plans.
Health Reimbursement Arrangement (HRA)
As an employer, you can offer an HRA plan alone or with other employee health insurance plans such as a cafeteria plan or flexible spending arrangement. The IRS only allows employers to contribute to an HRA. An HRA doesn’t impose dollar limit maximums unless the employee meets its definition of a highly compensated worker. When you contribute to an HRA on behalf of an employee, it doesn’t reflect as taxable income on his or her paycheck. The IRS also doesn’t limit what qualifies as an eligible expense.
You have significant flexibility in how you structure the plan as an employer. For example, you can allow the employee to designate a beneficiary and pay that person any unused funds if the employee passes away. Employers can also choose to issue debit or credit cards that make it more convenient for employees to access the funds.
Employer-Administered Reimbursement for Employee Health Insurance
The employer-administered reimbursement IRS-approved option enables you to reimburse employees in part or in full for the cost of health insurance premiums. To qualify as non-taxable income, the employee must present proof of the payment he or she received along with evidence that a health insurance policy was in force at the time of receiving the payment.
You also have the option to write the check directly to the insurance company that provides healthcare coverage for your employee. A third option is to write a check jointly to the employee and insurance provider. The opportunity to contact the insurance company directly for reimbursement would require the employee to sign over the check and mail or deliver the check to the health insurance provider directly.
Eligibility Requirements to offer Tax-Free Healthcare Reimbursement
Any of the above options that the employee couldn’t classify as a medical expense claim, whether for insurance premiums or direct payments to providers, would not meet the standards to receive a tax-exempt healthcare reimbursement. For example, a policy would be ineligible for tax-exempt status if it paid a flat amount to the employee during his or her hospitalization or that pays full or partial wages for permanent or temporary disability.
Schedule a Free Consultation to Learn More
At Preferred Insurance California, we realize that understanding various regulations and making the best choice for employee health insurance reimbursement can seem overwhelming. We invite you to complete our web form to request a free consultation with one of our small business health insurance brokers. We will assist you in exploring and evaluating all options so your business can continue to attract the highest caliber of job candidates.
Call (760) 385-8239 to schedule a free conversation