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Can I Pay Employees to Get their Own Health Insurance?

Written by: Christina Merhar
March 31, 2014 at 11:45 AM

Many small business owners are asking: "Can I pay my employees to get their own health insurance?"Can We Pay Employees to Get Their Own Health Insurance? @ZaneBenefits

That's because most small businesses want to offer health insurance, but struggle to afford traditional group health insurance.

In fact, cost is the number one reason why more than 50% of small businesses in the U.S. do not offer traditional group health insurance. That's over 2.3 million small businesses that don't offer group health insurance. 

The Affordable Care Act (aka "ObamaCare") creates new opportunities. Small businesses (<50 employees) aren't required to offer health insurance. And, there are new advantages of individual health insurance such as the premium tax credits and guaranteed-issue coverage that make individual health insurance just as good (if not better) than a small group health insurance plan.

Can I Pay Employees to Get their Own Health Insurance?

The answer is yes. But don't just start handing out cash. There is a better way than giving out taxable raises or salary bonuses. The more inexpensive way to "pay" employees to get their own health insurance is to reimburse for health insurance with a Section 105 "pure" defined contribution health plan

From a cost and compliance standpoint, this is the only recommended way to help with the cost of employees' individual or family health insurance premiums.

Small businesses should work with a defined contribution software provider to setup a plan in compliance with the ACA, the IRS, HIPAA, and the ERISA. Then with a defined contribution health plan:

  • The small business uses defined contribution software to provide each employee a fixed monthly allowance (a group health insurance plan is not offered).

  • Employees select and purchase any individual health insurance policy. Employees pay the health insurance company directly for the policy, and can access premium tax credits via their state's Health Insurance Exchange. 

  • Employees use their defined contribution allowance to reimburse themselves for their insurance premium, up to the amount of their allowance.

Why Not Just Pay Employees via a Taxable Raise or Bonus?

Some small businesses consider giving employees a taxable raise or salary bonus to pay them to get their own health insurance.

On the surface, providing raises or salary bonuses to employees may seem cheaper and simpler than setting up a formal defined contribution health plan. But there is one major consideration favoring defined contribution allowances for small businesses: Tax and overall cost savings.

By offering defined contribution allowances, both the small business and employees save money.

In addition to the cost savings, there are additional benefits of using a Section 105 defined contribution health plan. These include:

  • Compliance with various federal regulations (see this FAQ on compliance).

  • A formal health benefits plan in place, which helps to recruit and retain top employees.

  • The business knows the money is being spent on qualified health insurance premiums only, and the business keeps any unused allowance funds.

  • Defined contribution software makes administration and tracking easy and quick. Defined contribution software makes health benefits a simple payroll function, and takes 5 minutes per month.

Read more: Stop Giving Raises for Health Insurance and Start Offering Defined Contribution Allowances (Your Bottom Line Will Thank You).

Questions about how or why to use a defined contribution plan to pay employees to get their own health insurance? Leave a comment below.

The Comprehensive Guide to the Small Business HRA

Topics: Defined Contribution Health Plans, Small Business

Additional Resources

Trying to decide which HRA is best for you? Take our quiz to find out.
Get our guide on how to offer health benefits with a small budget.