If you're a small business owner, finding ways to improve your financial strategy while offering competitive benefits can feel like a balancing act. But one often-overlooked strategy does both: medical reimbursement plans. These plans allow you to reimburse employees for healthcare costs—while gaining meaningful tax advantages for your business.
In this article, we’ll explore how medical reimbursement plans work, the different options available, and how they can reduce your tax burden while improving employee satisfaction and retention.
Understanding Medical Reimbursement Plans
Medical reimbursement plans are employer-funded benefits that reimburse employees for qualified healthcare expenses. These plans are structured to offer flexibility and tax efficiency, making them especially attractive for small businesses that want to offer meaningful benefits without committing to high-cost group health insurance.
Types of Medical Reimbursement Plans
1. Qualified Small Employer HRA (QSEHRA)
Ideal for businesses with fewer than 50 employees, QSEHRA allows you to reimburse staff for qualified medical expenses and insurance premiums. These reimbursements are tax-free for employees and tax-deductible for you.
2. Individual Coverage HRA (ICHRA)
ICHRA gives employees a fixed allowance to purchase their own individual health insurance coverage. It offers flexibility for businesses of any size and helps employees find the coverage that fits their needs.
3. Group Coverage HRA (GCHRA)
GCHRA works alongside a traditional group insurance plan, helping employees cover out-of-pocket expenses. This can be a cost-effective way to boost coverage without dramatically increasing premiums.
4. Standard Health Reimbursement Arrangement (HRA
This option allows employers to reimburse employees for qualified medical expenses. It offers broad flexibility in how much and what types of expenses are reimbursed.
Key Benefits for Business Owners
1. Tax Advantages
Reimbursements made through these plans are typically tax-deductible for the business and non-taxable to employees—offering a rare double benefit.
2. Recruitment and Retention
Providing flexible, tax-advantaged health benefits can help you attract and retain top talent—especially in a tight labor market where benefits matter more than ever
3. Customization and Control
You set the budget and define eligible expenses, giving you more control over costs and allowing you to tailor the benefit to fit your financial and hiring goals.
What to Know Before You Launch a Plan
Eligibility and Ownership Rules Depending on your business structure (like an S Corporation), certain ownership rules may affect whether you, as the owner, can participate in the plan. It’s essential to understand these nuances to stay compliant and maximize your benefits.
Section 125 (Cafeteria) Plans
Want to give employees even more flexibility? A Section 125 plan lets them pay for certain benefits (like health insurance premiums, vision, or dental) with pre-tax dollars, further reducing their taxable income.
Consult a CPA to Get It Right
Choosing the right medical reimbursement plan—and setting it up correctly—requires careful planning. A CPA who specializes in small business tax strategy can help you evaluate your options, ensure compliance with IRS guidelines, and align your reimbursement strategy with your business goals.
Medical reimbursement plans offer an efficient, flexible way to reduce tax liabilities and improve your employee benefits. Whether you’re running a creative agency, a consulting firm, or a small retail operation, these plans can be a powerful tool to enhance financial strategy and team wellbeing.
Want to create a tax-efficient benefit strategy that works for your business and your team?
Schedule a consultation with Nth Degree CPAs today and let’s find the right medical reimbursement plan for your goals.
