Employers contribute to Personal Insurance

By: Zane Benefits, June 2014

Employers and agents often ask, “How can employers contribute to employees’ personal health insurance plans?” There are two main ways to provide an employer-funded contribution to employees’ personal health insurance plans.

1. Taxable Healthcare Allowance

The first option is a taxable healthcare allowance. With this approach, the employer reimburses employees for their substantiated personal health plan costs on a post-tax basis up to a healthcare allowance specified by the employer.

When offering a taxable contribution, the employer ensures employees use the dollars on health insurance and employees associate the arrangement as a health benefit.

However, one major limitation of this approach is the lack of tax advantage – requiring employees to pay taxes on the reimbursements they receive. As a result, most employees prefer their employers to establish an arrangement providing tax-free reimbursement of personal health plan costs.

Under Section 105 of the Internal Revenue Code (IRC), employers are able to establish a formal self-insured medical reimbursement plan to reimburse employees for individual health insurance premiums on a tax-free basis. Which brings us to option number two.

2. Tax-free Healthcare Reimbursement Plan (HRP)

The second option is a tax-free healthcare allowance. With this approach, the employer utilizes Section 105 of the IRC to establish a formal self-insured medical reimbursement plan to reimburse employees for their substantiated personal health plan costs on a pre-tax basis.

This type of arrangement is referred to as a Healthcare Reimbursement Plan (HRP); not to be confused with an employer payment plan allowed under Section 106.

When providing tax-free reimbursement of individual health insurance policies through an HRP, the employer must ensure compliance with federal regulations, including but not limited to legal plan documents, summary plan descriptions, and new “Market Reforms” required by the Affordable Care Act.

FAQ – What About Just Increasing Wages?

In addition to these two main options, some employers consider increasing employees’ taxable wages to help with their personal health plans. For example, a business might offer a taxable raise, stipend, or salary bonus with the hope that employees will use it on healthcare.

However, there are a few key problems with increasing taxable wages for health insurance such as it’s very hard to take back a raise for health insurance, it’s not guaranteed employees will spend the money on health insurance, and the employer loses top candidates to competitors with formal health benefits.

Zane Benefits