What are reimbursable out-of-pocket costs?

From unexpected medical bills to pricey prescriptions, out-of-pocket healthcare costs can add up quickly. According to the Kaiser Family Foundation¹ (KFF), about four in ten Americans say they have delayed or gone without medical care in the last year due to cost alone.

Thankfully, employers can help relieve this financial burden on their employees by reimbursing some of their medical expenses. Given that health coverage has consistently ranked as the most-requested employee benefit, this is an important perk to prioritize in your benefits package.

In this article, we'll go over what out-of-pocket costs are reimbursable and how you can offer reimbursements as a benefit to your employees.

Out-of-pocket costs

People covered by health insurance still worry about medical costs. The KFF found that about one-third of insured adults worry about affording their monthly health insurance premiums. Another 44% of people worry about affording their health insurance deductible before their coverage kicks in.

Out-of-pocket medical expenses refer to any healthcare cost that employer-sponsored or self-purchased health insurance don’t cover. This can include deductible payments, coinsurance costs, and copay fees for covered services. It can also include costs for healthcare services that aren't covered. When health insurance companies refer to out-of-pocket maximums, they typically only refer to in-network care for essential health benefits–however, individuals may incur out-of-pocket costs for other items and services like out-of-network care.

According to Healthinsurance.org², the out-of-pocket limit for an individual is $9,100 in 2023. For a family plan, the out-of-pocket maximum is $18,200.

Reimbursable health expenses

IRS Publication 502 outlines more than 200 expenses that are eligible for reimbursement with a health reimbursement arrangement (HRA).

Here are a few examples of eligible expenses:

• Monthly health insurance premiums
• Prescription drugs and over-the-counter medications
• Routine care and doctor's visits
• Emergency room care
• Eyeglasses and contact lenses
• Dental care
• Mental health care

Reimbursement with an HRA

HRAs are employer-funded health benefits that allow employers to reimburse their employees for their qualifying medical expenses. All reimbursements made through an HRA are completely tax-free for the employer and can be tax-free for employees, too, as long as they have minimum essential coverage (MEC). Many employers prefer HRAs as a cost-effective alternative to traditional group health insurance. But you can also pair an HRA with a group health plan to fill gaps in coverage.

PeopleKeep offers three popular HRAs:

• Qualified small employer HRA (QSEHRA): The QSEHRA is a standalone health benefit for small businesses with fewer than 50 full-time equivalent employees (FTEs).
• Individual coverage HRA (ICHRA): The ICHRA works for employers of all sizes. You can offer it as a standalone benefit or as an alternative health benefit to employees who don’t qualify for your current group health insurance plan.
• Group coverage HRA (GCHRA): The GCHRA, or integrated HRA, supplements a group health insurance policy. It covers out-of-pocket expenses not fully paid for by the group health insurance plan, like deductibles.

Reimbursement with a stipend

If you're looking for something simpler to offer your employees, an employee stipend is an easy option that's free of the IRS regulations that come with HRAs.

A health stipend can bridge the financial gap for your employee's medical care. A health stipend is a fixed amount of money that you offer your employees to help cover their medical services and other related costs.

But health stipends are a taxable fringe benefit, unlike tax-advantaged HRAs. That means employees would need to report their stipend as income like they would the rest of their paycheck come tax season. A stipend also doesn’t satisfy the Affordable Care Act's (ACA) employer mandate for organizations with 50 or more FTEs. Additionally, employers can’t require employees to prove that they’re using their stipend allowance toward health expenses,

Reimbursable wellness expenses

You can also offer a wellness stipend to reimburse employee wellness expenses. Unlike a health stipend, you don’t use wellness stipends to reimburse insurance premiums or out-of-pocket healthcare costs. Instead, they cover activities and programs that help promote healthy lifestyles for your employees.

With a wellness stipend, you can reimburse your employees for:

• Gym memberships
• Exercise classes
• Wearable fitness trackers
• Home exercise equipment
• Wellness apps

You can also reimburse other wellness-related expenses, such as personal trainers or health products.

Additional reimbursement ideas

If you want to attract and retain top talent, you need to offer a stand-out employee benefits package. Your employees have more expenses than just out-of-pocket medical costs.

Our 2022 Employee Benefits Survey Report found that 82% of employees said the benefits package an employer offers is an important factor in whether or not they accept a job.

Offering additional benefits can also help you become an employer of choice. Along with health and wellness benefits, you can offer stipends for remote work, commuter costs, and professional development.

Conclusion

The best way to reimburse your employees tax-free for their healthcare expenses, including their individual insurance coverage, is through an HRA. With our HRA administration software, you can offer a personalized health benefit that meets the needs of your unique team.

Ready to reimburse your employees for their medical costs? Schedule a call with one of our personalized benefits advisors now!

This blog article was originally published on February 14, 2022. It was last updated on July 11, 2023.

1. https://www.kff.org/health-costs/issue-brief/americans-challenges-with-health-care-costs/
2. https://www.healthinsurance.org/glossary/out-of-pocket-costs/