Key Takeaways
- A coverage gap doesn’t change the tax rules. Give an employee extra pay they can spend however they choose, and it’s generally taxable wages. Tie that same payment to their health insurance premium, and the IRS may treat it as an employer health plan.
- Getting the structure wrong is expensive. A noncompliant arrangement can trigger an excise tax of $100 per day for each affected employee, which adds up to $36,500 per employee for a full year.
- Accountable plans don’t cover personal health premiums. They reimburse business expenses, and an employee’s individual premium is a personal expense, not a business one.
- Owners generally can’t use the same arrangement as their employees. More-than-2% S corporation shareholders, partners, and sole proprietors follow a different set of rules.
Do you have employees living in a state your health plan doesn’t cover? If your team has grown past your home state, the answer might already be yes.
So what happens when your plan doesn’t reach someone? Can you just hand them the money to buy their own policy? Not the way most owners assume. Get the structure wrong, and a benefit meant to help your team can turn into a costly tax problem.
When a Regional Health Plan No Longer Fits Your Team
One of our clients had used a Kaiser Permanente plan for years. The company covered the full employee-only premium, and employees could add family coverage at their own cost. That worked well while the whole team worked out of the same state.
Kaiser is a common choice for employers in its home markets, but it’s a regional plan. As of 2026, it operates in eight states: California, Colorado, Georgia, Hawaii, Maryland, Oregon, Virginia, and Washington. Members generally need to live or work inside a Kaiser service area to enroll. Outside those areas, coverage is generally limited to emergency and urgent care.
By the time this client’s team had grown across several states, only about half fell within Kaiser’s service areas. The employees living outside that footprint were paying into a plan that didn’t give them practical access to routine care where they actually lived.
The owner’s question made sense: if the plan didn’t cover those employees properly anyway, why not let them buy their own policy and reimburse the premium?
It sounds like a simple fix. However, without the right structure, it can become an expensive one.
Why Paying the Premium Directly Is Risky
Thinking of introducing a system that allows staff to pay and claim? You can help pay for that coverage, but how you structure the payment is what decides the tax outcome.
When a company pays or reimburses an employee for an individual health policy outside a formal arrangement, the IRS generally treats the payment as a group health plan. This means the arrangement must follow the same federal coverage rules as other employer health plans. However, because an informal reimbursement is simply a payment towards an individual policy, it generally cannot meet those requirements. As a result, the company may face an excise tax of $100 per affected employee for each day the arrangement remains noncompliant.
There are three main ways to help an employee pay for individual health coverage, and each comes with a different tax outcome:
- Give them extra pay with no conditions attached
- Reimburse their premium informally, outside a formal plan
- Reimburse their premium through a formal ICHRA or QSEHRA
The table below breaks down how each one is taxed, whether the company can deduct it, and whether it creates a health plan in the IRS’s eyes.
| Approach | Employee’s tax | Company deduction | Creates a health plan? |
|---|---|---|---|
| Extra pay, no strings attached | Taxed in full, as wages | Generally yes | Generally no |
| Premium reimbursement outside a formal plan | Varies | Generally yes | Generally yes, noncompliant |
| ICHRA or QSEHRA (formal arrangement) | Generally none | Generally yes | Yes, compliant |
The difference between additional taxable pay and premium reimbursement comes down to one question: can the employee spend the money however they choose?
- If they can use it for anything, the payment is generally treated as taxable wages.
- If the payment depends on the employee buying a policy or providing proof of the premium, it becomes tied to health coverage and the employer health plan rules apply.
Can You Reimburse the Premium Through an Accountable Plan?
If you already reimburse mileage, business travel, or certain home-office costs tax-free through an accountable plan, it is natural to assume health premiums work the same way.
They do not. Accountable plans reimburse employees for costs they incur while doing their jobs. An employee’s individual health premium is a personal expense, so it does not qualify, no matter how carefully you document it.
Proof of the premium doesn’t make the reimbursement tax-free here, and that’s the part that catches people off guard. With most accountable-plan expenses, receipts are what make the reimbursement safe. With a health premium, that same proof ties the payment to coverage, which is exactly what triggers the $100-a-day exposure. To reimburse the premium tax-free instead, the company needs a compliant arrangement, such as an ICHRA or QSEHRA.
How an ICHRA or QSEHRA Makes Premium Reimbursement Compliant
Both arrangements provide a formal way to reimburse eligible employees for individual health insurance premiums. However, the right option depends mainly on the size of your company and whether you already offer a group health plan:
- Individual Coverage Health Reimbursement Arrangement (ICHRA): Available to employers of any size. It allows the company to reimburse eligible employees for individual premiums and other qualified medical expenses, provided they have qualifying individual coverage.
- Qualified Small Employer Health Reimbursement Arrangement (QSEHRA): Designed for employers with fewer than 50 full-time-equivalent employees that do not offer a group health plan. It can reimburse eligible employees for qualifying expenses, including individual premiums, subject to annual limits.
Neither arrangement begins with a simple payroll instruction. Instead, a licensed benefits broker or HRA administrator must establish the plan and prepare the required documents before reimbursements begin. Your tax and payroll teams must then ensure that all reporting follows the terms of the plan.
Can Business Owners Benefit From ICHRA or QSEHRA?
ICHRAs and QSEHRAs are built for employees, so most business owners don’t qualify to use them the same way their staff can. That generally excludes more-than-2% S corporation shareholders, partners, LLC members treated as partners, and sole proprietors. Attribution rules may also extend the S corporation restriction to an owner’s spouse and dependents, because the IRS treats a spouse’s or dependent’s ownership stake as if it belonged to the shareholder.
Are Health Cost-Sharing Programs a Cheaper Alternative?
As health insurance premiums rise, health cost-sharing programs may look like a more affordable option. These programs pool members’ monthly contributions to help pay medical bills, but they generally are not health insurance.
If the company pays an employee’s membership contribution, it may deduct the payment as compensation. However, the employee generally has to report that amount as taxable income. By comparison, qualifying employer-provided health insurance is generally tax-free to the employee.
A Coverage Gap Often Signals a Bigger Multi-State Compliance Risk
The health plan gap probably won’t be the only thing that changes when your team spreads across state lines. The same hires that outgrew your plan likely triggered new payroll and tax obligations too.
When an employee begins working in a new state, you generally need to register for state withholding and unemployment insurance there. That employee’s presence can also create a filing obligation for the business itself. Fix the health plan without checking those registrations, and you risk trading one compliance problem for another.
How Fusion CPA Can Help
Employee health insurance decisions can affect more than the premiums your company pays. Fusion CPA works with businesses whose health plans no longer cover employees in every state where they work, including remote offices in Atlanta, Utah, Tampa, and Nashville. We compare the tax treatment and after-tax cost of each option, confirm which employees and owners can participate, and make sure premium payments are handled correctly through payroll. We also coordinate the tax and reporting side with whatever plan your benefits broker puts in place.
Schedule a Discovery Call to review your employee health insurance arrangement before your next payment or plan renewal.
Frequently Asked Questions
Can an employer pay for an employee’s individual health insurance?
Generally yes, but the structure determines the outcome. Extra pay an employee may spend on anything is generally just taxable wages. A reimbursement tied to their premium, outside a formal arrangement, is generally treated as a noncompliant employer health plan, carrying an excise tax of $100 per day per affected employee.
A properly established ICHRA or QSEHRA is generally the compliant way to reimburse. Contact Fusion CPA at info@fusiontaxes.com to review an arrangement already in place.
Can health insurance premiums be reimbursed through an accountable plan?
Generally no. Accountable plans reimburse business expenses an employee incurs doing the job, and a personal health premium falls outside that. Requiring proof of premium as a condition of payment ties the money to coverage instead, which is what creates the noncompliant plan described above.
Can an S corporation owner participate in the company’s HRA?
Generally no. A more-than-2% shareholder, along with their spouse and dependents, generally can’t participate on a tax-favored basis. Owner coverage usually runs a different route: the company includes the premium in W-2 wages, and the shareholder may claim the self-employed health insurance deduction personally.
About the author
Trevor McCandless, CPA, MTax is the founder and CEO of Fusion CPA, a tax, outsourced accounting, and advisory firm serving business owners and high-achieving individuals across 40+ states from offices in Atlanta GA, Tampa FL, San Juan Puerto Rico, and Park City Utah. He works with owners on entity structure, owner compensation, and the multi-state exposure that arrives quietly with a growing team.
This article is reviewed by Steven Sumners, CPA, MAcc, Senior Tax and Accounting Manager at Fusion CPA.
About this article and how we use AI
This article is provided for general informational and educational purposes only and does not constitute tax, legal, accounting, or financial advice. Tax laws change and apply differently depending on your specific circumstances. Nothing here creates a client relationship with Fusion CPA, and it should not be relied upon or acted on without consulting a qualified professional about your own situation. To discuss how these rules apply to you, contact Fusion CPA at info@fusiontaxes.com.
Fusion CPA articles are grounded in the professional experience of our CPAs and the situations we encounter in practice. Scenarios described are illustrative composites, not any individual client’s facts. We use AI tools to assist with drafting and research. Before publication, every article is verified against primary sources such as the IRS and state departments of revenue and is reviewed for technical accuracy by a licensed CPA, who is named on the piece.