What is gap health insurance?

Rising healthcare costs have many employers searching for ways to provide quality employee health benefits without breaking the bank. If you’ve decided to offer a less expensive health benefit, it might leave employees with higher out-of-pocket costs. Gap insurance is a supplemental solution that can help employees in this situation. While gap insurance doesn't replace major medical insurance, it can help employees manage unexpected medical expenses like deductibles, copayments, and urgent care costs.

In this article, we'll explain how gap insurance works, whether it's a good option for your organization, and another affordable health benefit solution worth considering.

In this blog post, you'll learn:

• How gap insurance works in 2026 and what it covers.
• The differences between gap insurance, short-term insurance, and HRAs
• Important considerations like payout structures and HSA rules

How does gap insurance work?

Gap insurance helps employees cover out-of-pocket costs under high deductible health plans (HDHPs), up to the 2026 maximum out-of-pocket limit of $10,600¹. It's often referred to as "metal gap" because it can fill coverage gaps in the metallic tiers of healthcare coverage, especially small group or individual bronze and silver Affordable Care Act (ACA) plans, which often have lower premiums but higher out-of-pocket costs.

You or your employees must cover premium payments for gap insurance, regardless of whether they need medical care. Benefits are often paid directly to employees, offering flexibility in spending.

Employees can receive gap insurance payouts in two ways²:

1. Fixed-benefit: The insurer pays a predetermined cash amount for qualifying events. Employees can use it however they want.
2. Reimbursement: The insurer reimburses employees for actual medical expenses incurred, up to policy limits.

If a gap policy covers medical costs before employees meet their deductibles, it can disqualify them from contributing³ to a health savings account (HSA). Employers and employees need to carefully review plan terms to avoid losing tax-advantaged HSA benefits for those who want to contribute.

What does gap insurance cover?

Since gap insurance is a supplemental health insurance policy, it covers a limited range of medical services.

In situations where your employees need unplanned or emergency care, gap benefits can cover:

• Medical deductibles
• Copayments
• Doctor visits outside the provider network
• Living expenses such as housing, food, and transportation (depending on the policy)

Many gap health insurance plans include accident plans, critical illness plans, and hospital indemnity plans. Much like how you would shop around for traditional health insurance, you'll want to compare gap insurance providers and plan details before making a final decision.

When should you consider using gap insurance?

For many individuals, gap plans are a solid solution to the dilemma of high health insurance costs.

If you're looking to save your employees money on medical bills, a gap insurance policy helps reduce extreme out-of-pocket costs. It also gives them peace of mind for the unexpected in life.

Also, gap plans help you prepare for the worst-case scenario. If you have employees with health issues, they have a high probability of needing more consistent or serious medical care. Gap insurance provides more coverage for accidents and unplanned events.

Gap health insurance vs. HRAs

Gap health insurance can help you protect your budget, but it doesn't always work for every employer's situation.

Another option to stretch healthcare dollars is a health reimbursement arrangement (HRA). An HRA isn't health insurance. It's an employer-funded, tax-free health benefit that allows you to reimburse employees for more than 200 eligible medical expenses.

Some of those expenses include:

• Individual health insurance premiums (depending on the HRA you offer)
• Preventive services
• Emergency services
• Telehealth virtual visits⁴
• Over-the-counter medication
• Prescription drugs
• Mental health counseling

Many organizations prefer HRAs to gap coverage for the following reasons:

• No premiums are paid to a health insurance carrier with an HRA
• Employers control all HRA reimbursements and plan design
• An HRA can cover more eligible expenses than a gap insurance policy
• HRA expenses are based on actual utilization, and the employer keeps unused funds at the end of the plan year
• Minimized administrative hassle and employee confusion

The HRA option most similar to gap insurance is a group coverage HRA (GCHRA). The GCHRA is for employers already offering a group health insurance plan. With the GCHRA, you can offer both group health insurance and an HRA together to cover the costs not fully covered by the group health insurance plan. This allows you to help employees pay for their deductibles and other out-of-pocket expenses.

Other HRAs to consider

In addition to a GCHRA, employers have other HRA options that can help offset employee healthcare costs. While a GCHRA works alongside a group health plan, other HRAs serve as alternatives to it.

Two of the most popular stand-alone HRAs are:

• The individual coverage HRA (ICHRA): The ICHRA is for employers of any size. ICHRAs provide more flexibility than GCHRAs because employees choose their own individual insurance plans that fit their needs.
• The qualified small employer HRA (QSEHRA): The QSEHRA is for employers with fewer than 50 full-time equivalent employees (FTEs). Employees can purchase their own qualifying coverage if they don't have it already through a parent's or spouse's group health plan.

These options are especially useful if a GCHRA or traditional gap insurance isn’t the right fit for your team.

Avoiding common misunderstandings

Health coverage can be tricky, and there's often confusion surrounding certain abbreviations or terms. To avoid misunderstandings, we're sharing a few more details and explanations below.

Here are some similar terms often confused with gap insurance:

• Short-term health insurance (STM): This is a medical plan used when there's a gap in health insurance coverage, such as when people are between jobs. A short-term health insurance plan is temporary insurance that kicks in when no main medical plan is currently in place. If there were a gap in coverage, someone could face expensive medical bills if they were to get into an accident or suffer a medical emergency.
• Guaranteed asset protection (GAP) coverage: This is a standard automotive policy that pays the current market value of a vehicle at the time of a claim.
• Coverage gap: In terms of the ACA, the coverage gap exists in states that haven't adopted the ACA Medicaid expansion for people who aren't eligible for Medicaid coverage or subsidies in the federal Health Insurance Marketplace.
• Medicare Part D coverage gap: This is sometimes called the “donut hole." It's a temporary limit on drug coverage under Medicare Part D drug plans.

Conclusion

Gap insurance, also known as metal gap, helps employees cover out-of-pocket medical costs before reaching the 2026 out-of-pocket limit of $10,600. With proper planning, it can reduce financial stress for employees while complementing HDHPs.

If gap insurance isn't the right fit for your team, consider using a GCHRA, ICHRA, or QSEHRA. Many employers prefer to offer these HRAs because of the budget control, tax advantages, and flexibility they provide. Schedule a call with a PeopleKeep by Remodel Health HRA specialist today to get started!

This blog article was originally published on November 2, 2012. It was last updated on March 23, 2026.

References

1. Healthcare.gov: Out-of-pocket maximum limit
2. Legal Clarity:What Is Gap Medical Insurance and How Does It Work?
3. Legal Clarity: What Is First Dollar Coverage and How Does It Work?
4. IRS: Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans