As group health plan pricing continues to rise, many employees can’t afford their share of premiums, which can mean small business owners face tough choices about health benefits. You want to help your team get health coverage without breaking your budget or running into tax problems.
What you’ll learn
What you’ll learn
Key takeaways
- When set up properly, HRAs provide tax-free reimbursements for health insurance and medical expenses
- Three HRA types serve different business needs: ICHRA, QSEHRA, and Excepted Benefit HRA
- Health insurance stipends offer more flexibility but create taxable income for employees
- IRS rules require specific reporting and contribution limits for compliant reimbursements
What options do employers have? Reimbursing employees for health insurance gives you a way to support your team’s health costs without a traditional complex group plan. You have two main options: Health Reimbursement Arrangements (HRAs) that provide tax-free reimbursements, or health insurance stipends that offer flexibility but count as taxable income. In this guide, we cover all the details so you can help employees without wreaking havoc on your bottom line.
Understanding HRAs: Tax-free reimbursement options
A Health Reimbursement Arrangement (HRA) lets you reimburse employees with tax-free dollars for health insurance premiums and qualified medical expenses. Instead of managing group insurance policies, you set aside money for each employee to spend on individual health coverage. In this setup, employees buy their own plans and submit receipts for reimbursement up to their allowance.
The key advantage is cost control. You decide exactly how much to contribute rather than absorbing unpredictable premium increases from group plans. IRS Publication 502 defines qualifying expenses, including individual health insurance premiums, deductibles, co-pays, and other medical costs.
Can an employer reimburse an employee for health insurance?
With formal HRA programs, employer reimbursement for health insurance premiums is legal and commonplace. The IRS allows these arrangements if you follow specific rules about plan design, eligibility, and reporting. In other words, you can’t simply write checks to employees for their health insurance without creating taxable income and potential compliance issues.
So, what needs to happen? The reimbursement must go through a qualified HRA that meets IRS requirements. This includes written plan documents, uniform coverage for employee classes, and proper integration with other health benefits you might offer. When structured properly, both you and your employees avoid taxes on the reimbursement amounts.
Comparing HRA types: ICHRA vs QSEHRA vs excepted benefit HRA
Three HRA types serve different business situations. Choosing the right one depends on your company size and existing benefits.
In 2024, the average annual premium for employer-sponsored family health coverage rose 7% to $25,572, making alternatives increasingly attractive. The average deductible for single coverage increased 47% over the past decade, reaching $1,787 in 2024. Small business employees face average deductibles of $2,575, compared to just $1,538 at large firms.
Individual Coverage HRA (ICHRA)
ICHRA adoption grew 34% among applicable large employers from 2024 to 2025, which says a lot about its flexibility for companies of any size. With this plan, you can reimburse employees for individual health insurance premiums and medical expenses without contribution limits set by the IRS. Instead, you control the budget by setting your own allowance amounts.
ICHRAs can work well when you want to move away from group health plans. In this arrangement, employees shop for individual coverage that fits their needs, and you reimburse them up to their allowance. Just keep in mind that the ICHRA health insurance option requires employees to have individual health coverage to participate.
Qualified Small Employer HRA (QSEHRA)
QSEHRA serves small employers (with fewer than 50 full-time equivalent employees) who don’t offer group health plans. In 2025, the IRS set these annual contribution limits: $6,350 for individual coverage and $12,800 for family coverage.
Excepted Benefit HRA
This HRA supplements existing group health plans by covering expenses your main plan doesn’t pay. You can contribute up to $2,100 annually per employee in 2025.
| HRA type | Company size | Annual limits | Main use |
| ICHRA | Any size | No IRS limit | Replace group plans |
| QSEHRA | Under 50 employees | $6,350/$12,800 | Alternative to group plans |
| Excepted benefit | Any size | $2,100 | Supplement group plans |
Deciding whether to choose the QSEHRA or ICHRA depends mainly on your company size and whether you currently offer group coverage.
Health insurance stipends: Flexible but taxable
Health insurance stipends give employees cash allowances they can spend on health insurance or other needs. Unlike HRAs, stipends don’t require receipts or restrict spending to qualified medical expenses. You add the stipend amount to employee paychecks as additional taxable wages.
You can reimburse employees for health insurance through stipends, but the tax treatment differs significantly from HRAs. A $300 monthly health stipend becomes taxable income, reducing the employee’s take-home benefit more than a $300 HRA reimbursement would.
Stipends work well for businesses that want simple administration without HRA compliance requirements. However, they mean higher tax costs for employees and potentially higher payroll taxes for you.
IRS rules and reporting requirements
Can a small business reimburse employees for health insurance without tax consequences? Yes, through compliant HRA programs that follow IRS reporting requirements.
Contribution limits and timing
QSEHRA has fixed annual limits, annually adjusted for inflation. For 2025, you can contribute up to $6,350 for individual coverage and $12,800 for family coverage. ICHRA has no federal contribution limits, but you must apply allowances uniformly within employee classes.
Payroll and W-2 reporting
HRA reimbursements don’t appear on regular paychecks because they’re not wages. However, you must report them on employee W-2 forms in Box 12 with code FF. This informs the IRS about the health coverage you provided without creating taxable income for employees.
Reimbursing employees for health insurance premiums requires careful recordkeeping. You need documentation showing the reimbursement amounts, the dates, and that the expenses qualify under IRS rules.
Plan documentation
The IRS requires written HRA plan documents that specify eligibility rules, benefit amounts, and administrative procedures. These documents must be made available to employees and maintained for compliance audits.
Did you know that in a recent OnPay survey, over 60% of small businesses shared that they provide health insurance in their organization’s perks programs?
Common mistakes to avoid with health reimbursement
Small business owners often make costly errors when setting up health reimbursement programs. These mistakes can trigger IRS penalties and create payroll headaches.
Offering stipends without proper tax withholding
Some employers treat health stipends like reimbursements and fail to withhold taxes. This creates payroll tax problems and potential penalties. If you choose stipends over HRAs, treat them as regular taxable wages from day one.
Treating HRAs like informal reimbursements
You cannot simply reimburse employees for health expenses without formal HRA plan documents and procedures. Informal reimbursements become taxable income and lose the tax advantages that make HRAs attractive.
Missing deadlines or misreporting on W-2s
HRA reporting requirements differ from regular wages, and mistakes can trigger IRS inquiries. Box 12 reporting for HRAs uses specific codes, while stipends are recorded in regular wage boxes.
“I appreciate the simplicity while still having a wide range of features, and OnPay’s customer service is great, too. Pay runs are simple to do, and I don’t have to worry about recordkeeping for taxes, health insurance payments, or retirement benefits.”
— Byron K., Dermatology & Skin Care Center
Choosing the right reimbursement option for your business
Your company size often determines your best options. Businesses with fewer than 50 employees can choose QSEHRA, while larger companies typically consider ICHRA or stipends. Your current benefits also matter, since some HRA types require you to eliminate group health plans.
Choose QSEHRA if you have:
- Fewer than 50 employees
- No current group health plan
- Employees who want tax-free health benefits
- Willingness to handle HRA administration
Choose ICHRA if you:
- Have a company of any size
- Want to replace group health coverage
- Need higher contribution limits than QSEHRA
Choose stipends if you want:
- Maximum administrative simplicity
- Flexibility for employee spending
- No formal plan documents or complex IRS reporting
In 2025, employee retention concerns affect 53% of employers who identify it as a top focus, with 68% rating it as “very important.” Offering employee benefits through health reimbursements can help you compete for talent without the cost of traditional group insurance.
The most wanted employee benefits often include health coverage support, making reimbursement programs valuable recruitment and retention tools.
Health insurance reimbursements are worth having a handle on
Many employers are always looking for ways to take care of the teams they build and one way to do this is to ensure staffers have access to health coverage. And finding ways to reimburse staffers for some of these costs can help everyone stay healthy and pay out of pocket a bit less.
Whether you choose an HRA or stipend approach, the key is finding a system that works for your business size and administrative capacity. The right reimbursement strategy can become a valuable tool for attracting and retaining talent without the unpredictable costs of traditional group insurance.
When employees know they have support for their health expenses, it creates peace of mind that benefits both your team and your bottom line. And if you have questions, payroll HR services like OnPay could be a fit.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.