For most small businesses, traditional group health insurance is out of reach. But, that doesn’t mean health benefits are not attainable. As an alternative, small businesses are adopting employee health benefit allowances to help with the cost of employees’ personal health insurance.
When evaluating employee health benefit allowances, there are a few common routes to go. How does each option work, and which options are still compliant?
In this article, we’ll discuss four common scenarios for offering employees a health benefit allowance and what you need to know about each option:
Providing a Taxable Stipend
Using a Formal, Tax-Free Reimbursement Plan
Paying Premiums Directly to the Insurance Company
Reimbursing Employees without a Formal Plan
1. Taxable Stipend
Currently, taxable stipends are a compliant way to provide an employee health benefit allowance.
With a taxable stipend, the business grosses up salaries or provides taxable raises. With this option:
Employees receive a fixed, taxable stipend to purchase health insurance.
Employees receive the money whether or not they actually purchase health insurance.
Employee's monthly contributions are typically added to his or her paycheck.
At the end of the year, employees receive a form showing the amount of their stipend that they should report as income on their personal income tax return.
2. Formal, Tax-Free Reimbursement Plan
Currently, a tax-free reimbursement plan is a compliant way to provide an employee health benefit allowance, as long as the plan is designed to comply with all applicable federal rules.
With a formal, tax-free reimbursement plan, your business uses a tax-advantaged reimbursement plan like a health reimbursement arrangement (HRA) to give employees a health benefit allowance. With this option:
Employees are granted a fixed allowance amount to purchase health insurance, but only receive money if they actually purchase health insurance.
Employees purchase their own individual health insurance policy and submit proof to their employer (or the employer's third-party provider).
Employees receive monthly reimbursements up to their allowance amount that are typically added to their paycheck tax-free.
3. Paying Premiums Directly to the Insurance Company
Employers should avoid paying employees’ individual health insurance premiums directly because of potential ERISA and ACA violations and fees.
In the past, it has been somewhat commonplace for employers to pay employees’ health insurance premiums directly to the insurance company. However, there are three main reasons why this is not recommended:
Paying for individual health insurance without a qualified reimbursement plan (ex: Section 105 medical reimbursement plan causes the employer to "endorse" the individual health insurance plans, which can lead to ERISA violations.
Paying directly also causes the payments to become taxable income to employees.
According to the IRS, paying for individual health insurance directly is considered a type of Employer Payment Plan. Because Employer Payment Plans do not comply with new Affordable Care Act reforms, employers face penalties for noncompliance starting this year.
Tip - Employers who currently pay directly for employees’ health insurance premiums should transition to a compliant reimbursement arrangement or taxable stipend to avoid penalties.
4. Reimbursing Employees without a Formal Plan
Employers should avoid reimbursing employees directly (without a formal plan) for their individual health insurance premiums because of potential ACA violations and fees.
The last common scenario for giving employees a health benefit allowance is to reimburse employees for their substantiated health insurance premiums without the use of a formal, complaint arrangement.
Similar to number three above, reimbursing employees’ individual health insurance directly (without the use of a formal, complaint arrangement) is also considered a type of Employer Payment Plan. Because Employer Payment Plans do not comply with new Affordable Care Act reforms, employers face penalties for noncompliance starting this year.
Tip - Employers can easily transition to a compliant arrangement with a health reimbursement arrangement (HRA).
Offering an employee health benefit allowance allows small businesses to offer employees health benefits - often for the first time. But remember, make sure how you offer the employee health benefit allowance complies with current rules and regulations.
What questions do you have about an employee health benefit allowance? What other options have you seen? Join the discussion below.