As employers consider the costs and features of their benefits package, they may wonder if they’re able to reimburse their employees for health insurance.
Luckily, there are options that allow employers to reimburse employees for health insurance, including a taxable stipend or a health reimbursement arrangement (HRA). However, there are guidelines for both that employers must follow to reimburse their employees compliantly.
In this article, we’ll go over taxable stipends and HRAs and how these two options can work for your organization.
Looking to skip ahead? Pick a section below:
- How does a taxable stipend work?
- How does a tax-free HRA work?
How does a taxable stipend work?
With a taxable stipend, employees receive a fixed, taxable amount of money to help cover the cost of their health insurance and other medical expenses. Stipends have their perks, such as being easier to administer since they’re not subject to as many compliance issues as most group health plans. Employer payments are typically added to employees' paycheck or given as a separate check.
Stipends can be particularly helpful if you have a lot of employees that qualify for premium tax credits, as stipends don’t affect premium tax credit eligibility. However, stipends do increase employees’ overall household income, which may affect the size of their premium tax credit.
One drawback with stipends is that they come with taxes. Employers must pay payroll tax, and employees must claim the stipend as taxable income on their tax return. Additionally, employees don’t need to prove that they are using a stipend to purchase health insurance, so there isn’t any accountability for how the money is being used.
How does a tax-free HRA work?
With a formal, tax-free HRA, employers commit to a fixed allowance amount they will use to reimburse employees for their health insurance premiums and potentially other qualified medical expenses referenced in IRS Publication 502. Unlike a stipend, employers don’t pay anything until an employee submits proof of the incurred medical expenses with a receipt or invoice. Any unused allowance at the end of the plan year stays with the employer.
With an HRA, employees purchase their own coverage via the federal Marketplace or their state exchange. The employer reimburses employees monthly, up to their allowance amount, typically through their paycheck on a pre-tax basis.
If you have many employees on Medicare, then you’re in luck. HRAs can be a medical reimbursement tool for Medicare premiums, but there are conditions for each type of HRA, so be sure to read the regulations carefully.
With an HRA administration software provider like PeopleKeep, the following HRAs can help you offer a formal health benefit to support your employees’ healthcare needs in just minutes every month.
Qualified small employer HRA (QSEHRA)
A QSEHRA is for small employers with fewer than 50 full-time equivalent employees. It’s designed to reimburse employees, tax-free, for their medical expenses, including individual health insurance premiums up to a set contributed allowance amount.
With the QSEHRA, all reimbursements are free of payroll tax for the employer and free of income tax for employees as long as their health insurance policy provides minimum essential coverage (MEC). The critical thing small employers need to remember is that with a QSEHRA is that all employees must be reimbursed at the same level and you can’t offer a QSEHRA alongside a group health insurance plan.
Individual coverage HRA (ICHRA)
An ICHRA allows employers of any size to reimburse any amount per month for individual health insurance coverage, including premiums and healthcare expenses incurred by employees on a tax-free basis. It can be used as an organization’s stand-alone health benefit, or it can be offered to employees who aren’t covered by an organization’s group plan.
An important element of the ICHRA is that employees can be divided into classes, like hourly vs. salary, or even based on location, and be reimbursed at different levels.
Can I pay for employees’ health insurance directly?
When the Affordable Care Act (ACA) was implemented, employers were not allowed to reimburse employees for the cost of individual or family health insurance coverage. Pay raises were permitted, but there was no way to provide the money on a pre-tax basis or require that it be spent on health coverage.
Paying for individual coverage without a stipend, HRA, qualified spending account, or other formal health benefit is considered an employer payment plan, leading to Employee Retirement Income Security Act (ERISA) violations for being out of compliance with the ACA.
When it comes to health insurance coverage, employers have many options. Typically, the most significant deciding factors are price and flexibility for employers and employees. If you’re an employer wondering if you can reimburse your employees for health insurance, you have a couple of options: a taxable health stipend, or an HRA.
A taxable stipend is a good option if you want to avoid compliance challenges or if many of your employees qualify for premium tax credits.
With PeopleKeep’s WorkPerks benefit administration software, you can create a health stipend in minutes. WorkPerks allows organizations to offer their employees a monthly allowance for health, wellness, and remote work expenses.
An HRA is also an excellent option for your employees to take control of their health coverage while receiving tax-free medical reimbursements.
If you think an HRA or stipend would suit your organization, PeopleKeep can help! Simply schedule a call with one of our personalized benefits advisors, and we’ll get you on your way.
This article was originally published on January 24, 2022. It was last updated on February 28, 2022.