How Can Small Businesses Reimburse Employees for Health Insurance Costs?

As dental attorneys in Columbus, Ohio, Nardone Limited advises dentists and dental practices on a variety of matters, including human resources, taxes, as well as other legal matters that arise. For example, we routinely advise our dental practice owners that their employees are their most valuable asset. Because of this, it is important that dental practices offer competitive benefits to keep and attract employees. This includes providing health care benefits. But, group health care can often times be too expensive for some small businesses. An alternative to purchasing group coverage, is to reimburse your employees for their individual health care expenses. The government, however, has certain rules and restrictions employers must follow and be aware of before they start canceling their group coverage and begin reimbursing employees.


The Affordable Care Act (the “ACA”) only requires employers, who have 50 or more employees, to offer health care benefits to employees who work at least 30 hours per week. But, what about the employees who work for small businesses that do not offer health care benefits? Those employees are required to use the individual health insurance market to purchase coverage. The ACA prohibited employers from reimbursing employees for their individual market health insurance costs.  In fact, employers who reimbursed employees were fined $100 per day, per employee. Fortunately, beginning in 2017, under the 21st Century Cures Act employers are able to reimburse employees for their health care costs. The reimbursement, however, cannot be an outright reimbursement. Under the Century Cure Act, one of the approved reimbursement options for employers is to establish Qualified Small Employer Health Reimbursement Arrangements.

What is a Qualified Health
Reimbursement Arrangement?

Healthcare reimbursement arrangements allows small businesses to set aside a fixed amount of money each month that employees can use to purchase health care benefits or use on medical expenses, tax-free. Healthcare reimbursement arrangements are a good option for small businesses that want to offer reimbursement to more than one employee because it allows employers to offer health insurance in a tax-efficient manner without having to deal with the administrative hassle of a group plan.

With a healthcare reimbursement arrangement, the employer chooses a monthly benefit allowance to offer each employee. The allowance, however, cannot exceed $5,150 a year for self-only employees and $10,450 a year for employees with a family. To take advantage of healthcare reimbursement arrangements the employer must: (i) have fewer than 50 employees; (ii) offer the same terms to all eligible employees; (iii) put the same amount aside for each employee; and (iv) not offer group health care to any of its employees. In addition, the healthcare reimbursement arrangement must be fully funded by the employer, and the employee must show the employer proof of their expenses. An eligible employee means any employee of an eligible employer, except the terms of the healthcare reimbursement arrangement may exclude: (i) employees who have not completed 90 days of service; (ii) employees under age 25; (iii) part-time employees; and (iv) employees covered by a collective bargaining agreement. Payments from a healthcare reimbursement arrangement to reimburse an employee are not included in the employee’s gross income, thus, the employee is not taxed on the reimbursement. 

What makes healthcare reimbursement arrangements even more attractive to employers, is that healthcare reimbursement arrangements are not bank accounts. Unlike HSAs or flexible spending accounts, that are actually accounts, employers do not have to pre-fund an account or send money to an account to distribute funds to employees. The money stays with the employer until the employee makes a claim that is eligible for reimbursement.

Healthcare reimbursement arrangements are a great option for small dental practices that want to stay competitive for good talent, but may not have the budget to offer a group health care plan. Being able to offer health care reimbursement to your employees will help you retain key staff and also help attract more talent. Because of the requirements and rules involved in offering a healthcare reimbursement arrangement, you should consult a health care attorney to discuss your options before providing the benefit to employees.

Contact Nardone Limited

Our dental attorneys have experience assisting dental practices when it comes to human resource and tax issues. If your dental practice has questions regarding the best option for providing employees with health care benefits, or you have questions about setting up a healthcare reimbursement arrangement, you should contact the experienced dental attorneys at Nardone Limited. We can help guide you through your health care reimbursement options.