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Small Business Employee Benefits and HR Blog

How to Help Cover the Cost of Health Insurance (Legally!)

Help cover the cost of health insuranceOver 2.7 million small businesses in the U.S. do not offer health insurance, however most small businesses want to help cover the cost of health insurance. When traditional health insurance is not a fit because of cost, eligibility, or administrative barriers, there are ways for businesses to help cover the cost of individually-purchased health insurance.

But, wait. Can employers still help cover the cost of insurance? What about the new rules and reforms? 

In this article, we’ll lay out two simple (and compliant) options for helping employees with health insurance. We'll also provide fast facts to help you quickly wrap your head around each option.

Option 1 - Offer a Formal, Tax-Free Reimbursement Plan

The first option is to set up a formalized health reimbursement plan.

Here are a few fast facts about this option:

  • The reimbursement plan is 100% employer-funded.

  • Monthly allowance amounts are giving to eligible employees.

  • Allowance amounts can vary by employee class or family status.

  • Employees purchase their own individual health insurance policy and can access the premium tax subsidies, if eligible.

  • Employees are only reimbursed once they submit proof of their premium expense.

  • Reimbursements are tax-free to employees and tax-deductible to the business (allowed under Section 105 of the IRS code).

  • The reimbursement plan is a group health plan, and is designed to meet applicable federal regulations - including the new “Market Reforms.”

  • Most businesses use a third party (such as a healthcare reimbursement software) to set up the plan and manage reimbursements, compliance, and administration. Many services also help employees purchase health insurance policies

Read More: How to Give Employees Tax-Free Money for Health Insurance

Option 2 - Taxable Stipend for Health Insurance

The second option is to provide a stipend (ie: a raise or bonus) for employees to use on health insurance.

Here are a few fast facts about this option:

  • Employees receive a fixed, taxable stipend to purchase health insurance.

  • Employees receive the money whether or not they purchase health insurance (note - with this option it is important the business does not ask employees to show proof of health insurance, as this would be considered a non-compliant Employer Payment Plan).

  • Employers can simply add money to employees’ paychecks, or use a software service to set up, manage, and communicate the stipends. Many services also help employees purchase health insurance policies.

To learn more about these two options, download our free guide, The Small Business Guide to Individual Health Insurance Reimbursement.

FAQ - Can We Just Pay for Employees’ Health Insurance Directly?

No. We’ve written about this topic extensively (read more here). To summarize, paying for individual health insurance without a qualified reimbursement plan causes the employer to "endorse" the individual health insurance plans, which can lead to ERISA violations. It also causes the payments to become taxable income to employees.

Additionally, 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 may face penalties for noncompliance starting this year.

Conclusion

Just because traditional group health insurance is out of reach doesn’t mean small businesses cannot help cover the cost of health insurance. With either a tax-free reimbursement plan or a taxable stipend, health benefits can be attainable.

What questions do you have about these options for covering the cost of health insurance? Leave a question below. We’ll help answer it.