Your employees are your organization’s most valuable asset. To attract and keep quality talent, you need to offer a competitive benefits package. A benefits package that makes sense - and is affordable - for your organization and employees.
With that in mind, you may ask, "Can Employers Still Contribute to Personal Premiums?"
New healthcare legislation has leveled the playing field for small organizations to offer competitive health benefits by using software solutions to offer a real dollar contribution to employees’ individual health insurance premiums. In other words, reimburse employees for their premiums, instead of paying for a group health insurance policy.
This solution enables your small organization to offer health benefits and have a powerful tool for recruiting and retaining the best employees.
There are two main ways to provide an employer-funded contribution to employees' personal health insurance plans.
1. Taxable Healthcare Stipend
The first option is a taxable healthcare stipend. With this approach, the employer reimburses employees for their substantiated personal health plan costs on a post-tax basis up to a healthcare stipend specified by the employer.
When offering a taxable contribution, the employer ensures employees use the dollars on health insurance and employees associate the arrangement as a health benefit.
Tip: Stipend amounts are maximum contribution amounts. If an employee doesn’t spend their stipend by the end of the year, unused funds stay with your organization.
However, one major limitation of this approach is the lack of tax advantage – requiring employees to pay taxes on the reimbursements they receive. As a result, most employees prefer their employers to establish an arrangement providing tax-free reimbursement of personal health plan costs.
Under Section 105 of the Internal Revenue Code (IRC), employers are able to establish a formal self-insured medical reimbursement plan to reimburse employees for individual health insurance premiums on a tax-free basis. Which brings us to option number two.
2. Health Reimbursement Arrangement (HRA)
The second option is a tax-free healthcare stipend. With this approach, the employer utilizes Section 105 of the IRC to establish a formal self-insured medical reimbursement plan to reimburse employees for their substantiated personal health plan costs on a pre-tax basis.
This type of arrangement is referred to as a health reimbursement arrangement (HRA).
When providing tax-free reimbursement of individual health insurance policies through an HRA, the employer must ensure compliance with federal regulations, including but not limited to legal plan documents, summary plan descriptions, and new “Market Reforms” required by the Affordable Care Act.
Tip: Providing a tax-free reimbursement plan is better than cash because:
- The company saves on FICA/FUTA payroll taxes
- Employees do not pay taxes on the reimbursements (received “tax-free”).
FAQ - What About Just Increasing Wages?
In addition to these two main options, some employers consider increasing employees' taxable wages to help with their personal health plans. For example, a business might offer a taxable raise, stipend, or salary bonus with the hope that employees will use it on healthcare.
However, there are a few key problems with increasing taxable wages for health insurance. It's very hard to take back a raise for health insurance, it's not guaranteed employees will spend the money on health insurance, and the employer loses top candidates to competitors with formal health benefits.
FAQ – How Do I Set a Budget for Employee Reimbursements?
If you’re concerned about setting a budget for your HRA, we have two simple approaches:
- Divide your health benefits budget by the number of eligible employees.
Example: If you have 10 employees and your monthly health benefits budget is $2,000, each employee would receive a stipend of $200/month.
- Set your budget by considering average individual health insurance rates, and contributing an estimated percentage.
Example: If the average individual health insurance policy for your 10 employees is $250/month and you’d like to contribute 85%, then you’d offer each employee $213/month - for a monthly budget of $2,125.
The answer to the common question, “Can Employers Still Contribute to Personal Premiums?” is yes, through an HRA. As your organization evaluates health benefits where you reimburse premiums, consider the taxable and tax-free options available to you.
With guidance on the disadvantages of forgoing health insurance in favor of increasing wages, and information on setting a budget, you are now more equipped to determine what course of action is best for your small business.
Editor's Note: This post was originally published in June 2014.
What questions do you have about contributing to employees' personal health plans?