Can My Employer Reimburse My Individual Health Insurance Premiums?

Under IRS guidance related to the implementation of the Affordable Care Act (ACA), there was a several-year stretch when employers were not allowed to directly reimburse employees for the cost of individual market health insurance. This was true for both small and large groups, and employers faced steep fines for noncompliance.

But the 21st Century Cures Act opened the door for small employers to start reimbursing employees for individual market health insurance premiums as of 2017. And the Trump administration finalized new regulations in 2019 that allow employers of any size to reimburse employees for the cost of individual market coverage, starting in 2020. We'll explain both of these provisions in this article.

Small Groups: Employer Reimbursement Was Not Allowed in 2015/2016

The Affordable Care Act only requires employers to offer health insurance benefits—to employees who work at least 30 hours per week—if they have 50 or more employees. But 96% of employers in the US have fewer than 50 employees and are thus not required to offer health benefits to their workers.

Many of them do, of course. According to a survey conducted by the Transamerica Center for Health Studies in August 2015, health insurance benefits were offered by 61% of businesses with fewer than 50 employees. But that might be a high estimate. A National Federation of Independent Business analysis indicated that only 29% of businesses with fewer than 50 employees were offering coverage in 2015. And Kaiser Family Foundation reports that about 31% of businesses with fewer than 50 employees were offering health benefits as of 2019.

Small group health insurance plans are available in every state, and innovative approaches to self-insurance have made this coverage option more realistic for small employers as well.

But what about the people who work for all of the small businesses that don't offer health insurance benefits? They have to use the individual health insurance market, where they can purchase coverage through the health insurance exchange, or outside the exchange (the ACA's premium subsidies and cost-sharing subsidies are not available outside the exchange).

For plans purchased in the individual market (on or off-exchange), the enrollee—as opposed to an employer—is responsible for paying the premiums, although subsidies—which are actually tax credits—are available in the exchange for people who qualify based on their income.

Early ACA implementation regulations prohibited employers from reimbursing employees for individual market health insurance. For small employers, this changed as of 2017, under the 21st Century Cures Act (more details below), but let's take a look at how the rules were interpreted prior to 2017.

The ACA itself left this issue somewhat open to interpretation, but the IRS subsequently addressed the issue directly, and the penalty for non-compliance was steep: an excise tax of $100 per day, per applicable employee. That could be as high as $36,500 per year in fines for each employee for whom the employer reimbursed individual health insurance premiums. The regulations were scheduled to take effect in January 2014, but a transitional relief program was put in place that delayed the penalty until July 2015.

Essentially, the way the IRS interpreted ACA statute, reimbursing employees for individual market premiums was considered an "employer payment plan." Such plans are subject to group health insurance market reforms, including the ban on lifetime and annual benefit limits, and the requirement that certain preventive care be covered at no cost to the enrollee. 

And the IRS specifically clarified that employer payment plans could not be combined with individual market health insurance plans in order to fulfill the market reform requirements. This was true regardless of the fact that the ACA's market reforms do apply to individual market plans, and all new individual market plans are sold without lifetime or annual benefit limits, and with the same preventive care benefits as small group health plans.

There was nothing preventing employers from giving their employees a raise or taxable bonus in lieu of providing health insurance benefits. But the tax-advantaged benefits of group health insurance premiums and health reimbursement arrangements could not be used in order to reimburse employees for individual health insurance premiums.

21st Century Cures Act Passed in 2016, Began Allowing Reimbursement as of 2017

In December 2016, H.R.34, the 21st Century Cures Act, was signed into law by President Obama. The legislation is far-reaching, but one of the changes it made was to allow businesses with fewer than 50 employees to establish Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs).

If a small business doesn’t offer a group health insurance plan, a QSEHRA will let the business reimburse employees, tax-free, for some or all of the cost of purchasing individual market health insurance, on-exchange or off-exchange.

If the plan is purchased on-exchange, the employee could still be eligible for a premium subsidy, but the value of the QSEHRA is considered when determining the affordability of the coverage, and the amount of the ACA subsidy is reduced by the amount that the employee receives from the employer through the QSEHRA.

If an employer uses a QSEHRA, there's a maximum amount they can reimburse each employee each year, and the limit is adjusted annually by the IRS. For 2022, the maximum QSEHRA reimbursement is $5,450 for a single employee and $11,050 for a family. The maximum reimbursement is also prorated by month, so an employee hired in the middle of the year would only be eligible for a prorated amount of the maximum annual reimbursement.

Who Is Helped by the New QSEHRA Reimbursement Rules?

For employees who work for small businesses that don't offer health insurance, the availability of premium subsidies in the exchanges depends on income, along with family size and the cost of coverage in the applicant's area.

The American Rescue Plan (ARP) enhanced premium subsidies through the end of 2022, and the Inflation Reduction Act extended the ARP's subsidy enhancements through 2025.

Under the ARP rules, subsidies are available in most cases if the cost of the benchmark plan would be more than 8.5% of the applicant's household income (household income is an ACA-specific calculation). For households with income below 400% of the poverty level, the percentage of income they have to pay for the benchmark plan is even lower, dropping all the way to 0% for people on the lowest end of the income spectrum.

If you're currently receiving a premium subsidy (premium tax credit) in the exchange and your employer begins reimbursing premiums under a QSEHRA, the exchange subsidy would be reduced by the amount of the employer reimbursement. 

But if you're not eligible for a premium subsidy in the exchange (or if you are, but have opted to buy your coverage outside the exchange, where subsidies aren't available), a QSEHRA could directly benefit you if your employer decides to take advantage of that option.

This article outlines various situations in which a QSEHRA benefit can be helpful, harmful, or neutral to an employee's financial situation.

Additional Regulations Allow Employers of Any Size to Reimburse Individual Market Premiums Starting in 2020

Prior to 2020, large employers were not allowed to reimburse employees' individual market premiums. Employers with 50 or more full-time employees are required to offer group health insurance (purchased from an insurance company or self-insured) in order to avoid the ACA's employer mandate penalty, and they faced even steeper penalties, as described above, if they reimbursed employees for individual market premiums.

But in October 2017, President Trump signed an executive order aimed at relaxing the rules on this issue. The executive order didn't change any rules on its own; it simply directed federal agencies to "consider proposing regulations" that would accomplish various goals. 

One of those goals was to expand the use of health reimbursement arrangements (HRAs) and provide more flexibility in their use, including "allow[ing] HRAs to be used in conjunction with nongroup coverage." (Nongroup means coverage purchased in the individual market, whereas group coverage refers to plans that are offered by employers.)

A year later, in October 2018, the Departments of Labor, Treasury, and Health & Human Services published proposed regulations to allow the use of HRAs in conjunction with individual market coverage, regardless of the size of the employer.

The regulations were finalized in June 2019, mostly as proposed but with some changes. The new rule took effect as of January 2020, allowing large employers to fulfill the ACA's employer mandate by offering an individual coverage HRA (known as an ICHRA, pronounced "ick-rah") used to reimburse employees for the cost of individual market health insurance.

(The rule also allows employers to offer "excepted benefit" HRAs, which can be used to reimburse premiums for coverage that's considered an excepted benefit. But since excepted benefits are not minimum essential coverage, a large employer cannot fulfill its employer mandate responsibility by offering an excepted benefit HRA.)

Relatively few employers offered ICHRAs in early 2020, as the rules were finalized only a few months before most employers ran their open enrollment periods for 2020 coverage, and there wasn't time to get them up and running. But uptake has been growing and it's widely expected that they will become more common in future years.

While QSEHRAs can only be offered if the employer doesn't offer any group health insurance at all, the new rules allow employers to offer some employees a group health plan, while offering others an HRA that can be used to reimburse individual market premiums.

If that route is taken by an employer, the distinction must be based on bonafide employee classifications—for example, full-time versus part-time employees—and employees cannot be offered an option of either a group plan or an HRA.

And no class of employees can be offered a choice between a group health plan and an individual coverage HRA. In other words, the employer has to make the choice of which option to offer to each class of employees; it can't be left up to the employee to choose.

In addition, the final rule stipulates that if a class of employees is offered an individual coverage HRA, it has to include a minimum number of employees: At least 10 if the business has fewer than 100 employees; at least 10% of employees if the business has between 100 and 200 employees, and at least 20 employees if the business has 200+ employees.

This helps to prevent adverse selection (for the individual market) that could arise if a business were to, for example, have only a handful of employees who happen to be older/sicker, etc. than average—but who also happen to be a bonafide class of workers—and opt to transfer those workers to the individual market via an individual coverage HRA in order to save money on the group's health plan.

As is the case with QSEHRAs, there is a somewhat complex interaction between premium subsidy eligibility and individual coverage HRAs. But there are some important differences:

• A person can receive a QSEHRA benefit and a premium subsidy, depending on the circumstances, but cannot receive both a premium subsidy and an ICHRA benefit.
• If the ICHRA is considered affordable health coverage, the employee is not eligible for premium subsidies (this is the same as the rule that applies to an offer of employer-sponsored group coverage: If the group coverage is considered affordable and the plan provides minimum value, the person is not eligible for a subsidy in the marketplace).
• And while employer contributions to QSEHRAs are capped, there is no limit to how much an employer can reimburse via ICHRAs.

For 2022, an ICHRA is considered affordable health coverage if it allows the employee to purchase the lowest-cost silver plan in the individual market without spending more than 9.61% of household income on self-only premiums.

(This is just the regular affordability test that applies to employer-sponsored group health plans; it also applies to ICHRA benefits, as they are treated just like any other employer-sponsored health plan in this regard.)

As a reminder, an ICHRA functions like regular employer-sponsored health insurance: A person cannot be enrolled in an employer-sponsored plan and also enrolled in an individual market plan with premium subsidies. Enrollees will need to ensure that they understand the details regarding their eligibility for premium subsidies in the exchange—and how that eligibility is affected if their employer offers an individual coverage HRA.

Unlike QSEHRAs, the final rule for individual coverage HRAs does not limit how much employers can reimburse employees for their individual market coverage. Businesses have to be consistent in terms of the amounts they offer to members of a class of employees, and although reimbursement amounts can vary based on the employee's age, the age-based adjustment to reimbursement amounts can't vary by more than a 3:1 ratio.

If an ICHRA covers some, but not all, of the employee's premiums for self-purchased coverage, the employer can allow the rest of the premium to be payroll deducted on a pre-tax basis. But this is only available if the plan is purchased outside the exchange.

This is an important point to keep in mind. Shopping in the exchange is usually the best option for people obtaining their own health coverage, as that's the only way to get access to premium subsidies. But subsidies are not available if you also have an ICHRA, and you'll have to shop outside the exchange if your employer is offering an option to payroll deduct the rest of your premiums.

The final rule stated that 1.1 million people were expected to receive ICHRA benefits in 2020, and that number is expected to grow to more than 11 million people by 2029.

Summary

When the ACA was first implemented, employers were not allowed to reimburse employees for the cost of self-purchased individual/family health coverage. A general pay raise was allowed, but there was no way to provide the money on a pre-tax basis or require that it be spent on health coverage.

But over the last few years, two types of pre-tax health reimbursement arrangements—QSEHRAs and ICHRAs—have been created. These options allow employers to reimburse employees for self-purchase health coverage instead of offering a group health plan. And large employers can satisfy the ACA's employer mandate with an ICHRA.

A Word From Verywell

Most large employers offer health coverage, and a significant number of small employers do so as well. But there have been changes in recent years that allow employers the option to reimburse employees (on a pre-tax basis) for the cost of self-purchased health coverage. Some employers have taken this option for some or all of their employees, and more are expected to do so as time goes on.

If your employer is offering you a health reimbursement arrangement to offset some or all of the cost of obtaining your own health coverage, you'll need to sign up for a plan in the individual market and provide proof of coverage to your employer in order to obtain your reimbursement. Your employer or HR department will be able to answer your questions about the specific benefit that's available to you, and an insurance broker can help you sort through the available options.