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Small Business Employee Benefits and HR Blog

Health Insurance Stipend vs. A Reimbursement Plan - Which is Better?

December 30, 2014
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Health Insurance Stipend vs. A Reimbursement Plan - Which is Better?

Every day, I hear small business owners ask questions about how to reimburse employees for individual health insurance.

"Should we provide a stipend?"

"Should we set up a reimbursement plan?"

How would each of these work?"

"Which is better?"

In this article, I'll break down the two primary options for reimbursing employees for their individual health insurance premiums, and talk about the pros and cons of each approach.

Option #1: Health Insurance Stipend

With a health insurance stipend, all similarly situated employees receive a fixed, taxable stipend to purchase individual health insurance, whether or not they actually purchase health insurance. The 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.

Pros of a Health Insurance Stipend:

  • Not a group health plan
  • No compliance issues
  • Very simple and easy administration (automatic payroll additions)

Cons of a Health Insurance Stipend:

  • Company is required to pay payroll tax on reimbursements (7.65%)
  • Employees must claim reimbursements as income (20-40%)
  • Employees receive money regardless of whether they use it toward a health insurance premium

Option #2: Reimbursement Plan

With a reimbursement plan, such as a Health Reimbursement Arrangement (HRA), all similarly situated employees are granted a fixed allowance amount to reimburse themselves for health insurance and other medical expenses, 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.

Pros of a Reimbursement Plan:

  • Employees must show expense before reimbursement
  • Feels like a real, structured health benefits program
  • Tax-free to employees (20-40%)
  • No payroll taxes for employers (7.65%)

Cons of a Reimbursement Plan:

  • It is not health insurance
  • Employer must take steps to ensure compliance with legislative guidelines*

*To make sure your arrangement is compliant, and to make compliance easy, use a personalized benefits automation software

Tip: With a reimbursement plan (option #2) the business reimburses employees only for eligible premium expenses and qualified medical expenses, up to the amount of their allowance. With no annual renewal increases, no minimum contribution amounts, and no minimum participation requirements, the business is free to set and control all costs.

So, Which Is Better?

Whether a health insurance stipend (option #1) or a reimbursement plan (option #2) is better for your small business depends on your health benefit goals. For many small businesses, a formal reimbursement plan (option #2) achieves both the health benefit goals and saves the business money because of tax savings.

What do you think? Leave a comment or question below.

Annual Report 2017: Small Business Health Insurance Reimbursement

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