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How to Set Up an Employee Benefits Allowance

Written by: PeopleKeep Team
December 30, 2014 at 12:00 PM

There’s a reason that small business employers are changing the way they offer health benefits to their employees - group health insurance is too costly, and employee benefits allowances save money. So, if you’ve made the decision to offer an employee benefits allowance, here are the steps to set it up, along with a little further understanding of what types of allowances there are to choose from.

Types of Employee Benefits Allowance

Taxable Health Benefits Stipend

With a health benefit stipend, you would provide employees a fixed, taxable stipend to purchase individual health insurance or spend on other health benefits. The stipend is received regardless of whether or not employees actually purchase health insurance or benefits. As the employer, your monthly contributions are typically added to employees’ paychecks. 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.

The disadvantage to a taxable health benefits stipend is that the company is required to pay payroll tax on reimbursement (7.65%) and your employees will be required to claim the stipend as part of their income (20-40%).

Health Insurance Reimbursement Plan

A health insurance reimbursement plan is a second type of employee benefits allowance. With a reimbursement plan, employees are granted a fixed allowance amount to purchase individual 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 (optional).

A health insurance reimbursement plan has several advantages over a taxable health benefits stipend. For example, it is a tax-free optional to employees (20-40%), payroll taxes are optional for you as the employer (7.65%), and employees are only reimbursed for their health insurance premiums as they show proof of the expense. Furthermore, a health insurance reimbursement plan feels like a real, structured health benefits program.

For a more in-depth look at health insurance premium reimbursement, click here.

Steps to Set Up Employee Benefits Allowance

To offer an employee benefits allowance as the core health benefits offering, follow these three steps.

  1. Cancel group health insurance. Most plans can be cancelled at any time, and when an existing group plan is cancelled, you’ll qualify for a special enrollment period (outside of open enrollment) to enroll in an individual health insurance policy.

  1. Set up a reimbursement plan. Decide how you will offer employee benefit allowances (as detailed above). If using a formal reimbursement plan, work with a reimbursement software provider to ensure compliance.

  1. Educate Your Employees. Step three is to educate employees about their options with individual health insurance and how their benefits allowance works. Get creative and make sure your employees have a thorough understanding.

Have you switched to an employee benefits allowance? If so, how has it helped you and your employees? If not, what advantages do you see to implementing it over group health insurance? Comment below.

Topics: Health Reimbursement Arrangement, Health Benefits

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.