Setting up a SIMRP: Key Considerations for Reimbursing Employee-Paid Health Insurance

ewalker223
Mar 3
4 min read

As a business owner, you might be considering reimbursing your employees for their health insurance premiums. Offering reimbursement can help your employees reduce their personal out-of-pocket costs, and it can benefit your company by making you a more attractive employer. However, it's important to understand the rules and regulations governing this practice to ensure compliance and maximize tax benefits. Here’s a breakdown of key considerations for reimbursing employee-paid health insurance.

1. IRS Section 105 Plans Allow It

Under Section 105 of the Internal Revenue Code, employers can reimburse employees for medical expenses, including health insurance premiums, as long as the plan is structured properly. This is especially helpful for small businesses that don’t offer group health insurance plans but still want to help their employees with individual health coverage costs. You can read more about IRS Section 105 here:https://www.irs.gov/irb/2002-47_IRB#RR-2002-47

2. Reimbursements Are Tax-Free

When a self-insured medical reimbursement plan (SIMRP) is set up properly and follows IRS guidelines, reimbursements for employees' individual health insurance premiums come with multiple benefits for both the employee and the employer:

Tax-Free for the Employee: Employees don’t pay taxes on the reimbursements they receive for their health insurance premiums. This means they get to keep the full reimbursement amount without any tax liabilities.
Tax-Deductible for the Employer: Employers can deduct the full cost of the reimbursements as a business expense, which reduces their taxable income and can significantly lower their overall tax liability. More information on business tax deductions can be found on the IRS website here:https://www.irs.gov/businesses/small-businesses-self-employed/deductions
Exempt from FICA Taxes: Payments made through a properly structured SIMRP are not subject to FICA taxes (Social Security and Medicare taxes), which means that both the employer and employee save on payroll taxes. For employers, this can result in considerable tax savings, and employees don’t have to pay their share of FICA taxes on the reimbursements. Learn more about FICA tax exemptions here:https://www.irs.gov/taxtopics/tc751

3. HRA vs. Traditional SIMRP

When deciding how to structure health insurance reimbursements, you have a couple of options: a Health Reimbursement Arrangement (HRA) or a Traditional SIMRP. Each offers benefits but must be implemented differently:

Health Reimbursement Arrangement (HRA): This is a common option for small businesses. An HRA allows employers to reimburse employees for individual health insurance premiums on a tax-free basis. The HRA is simple to set up and is often a good solution for businesses without a group health insurance plan. You can learn more about HRAs from the IRS here:https://www.irs.gov/pub/irs-pdf/p969.pdf
Traditional SIMRP: This plan can also be used to reimburse health insurance premiums, but it must be designed in compliance with the Affordable Care Act (ACA). For example, it must meet certain requirements related to non-discrimination and the provision of minimum essential coverage (MEC) for employees. Additional details on ACA compliance can be found here:https://www.irs.gov/affordable-care-act

4. Compliance Warning (ACA & IRS Rules)

While reimbursing health insurance premiums can be an attractive benefit, employers must ensure their reimbursement plans meet specific guidelines to avoid penalties and tax issues. Here are a few critical compliance points to consider:

Non-Discrimination Rules: Employers must offer the reimbursement plan in a manner that is non-discriminatory. This means they can’t selectively reimburse only certain employees based on job title, compensation, or any other criteria. Reimbursement must be offered fairly to all employees. Learn more about non-discrimination rules here:https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/erisa
Affordable Care Act (ACA) Restrictions: If your company has 50+ employees, it must meet ACA Minimum Essential Coverage (MEC) requirements. Failing to meet these requirements can result in significant penalties. To avoid this, ensure that the plan you offer complies with ACA regulations, especially when it comes to providing affordable coverage for your employees. Details about ACA Minimum Essential Coverage can be found here:https://www.healthcare.gov/glossary/minimum-essential-coverage/
No Double-Dipping: Employees cannot claim a tax credit or subsidy from the ACA marketplace for premiums that are reimbursed through an employer plan. This means employees should not receive subsidies for the same premiums reimbursed through the SIMRP. Employers must ensure that the reimbursement doesn’t conflict with any tax credits employees might receive for purchasing insurance through the marketplace. More information about double-dipping restrictions can be found here:https://www.healthcare.gov/blog/double-dipping/

Conclusion

Reimbursing employees for their individual health insurance premiums through a Self-Insured Medical Reimbursement Plan (SIMRP) can offer significant tax advantages for both the employer and employee. However, businesses must ensure their plans comply with IRS and ACA rules to avoid penalties and make the most of these benefits.

If you're considering implementing such a plan or need help structuring one in compliance with IRS and ACA guidelines, contact us today to discuss how we can help you set up a compliant and effective reimbursement program that benefits both your business and your employees.

Let’s talk!

Disclaimer: This post is for informational purposes only and is not intended as legal, financial, or tax advice. Always consult with a tax professional or legal advisor to ensure compliance with applicable laws and regulations regarding Self-Insured Medical Reimbursement Plans (SIMRP) and employee benefits.