For many small and medium sized businesses (SMBs), offering a traditional group health insurance plan is an expense they simply can’t afford. Luckily, there are other, more affordable and flexible options that make offering health insurance possible.
A common question we often get from SMBs is, “Can I offer employees a stipend in lieu of health insurance?”
The short answer is yes—employers can provide workers with a health insurance stipend to help pay the cost of an employee’s individual health insurance. However, business owners should be aware of the tax implications of a health insurance stipend versus a tax-free reimbursement plan like a health reimbursement arrangement (HRA).
In this article, we’ll go over both taxable stipends and tax-free reimbursement plans as alternatives to group health insurance so you can decide which is best for your organization.
Interested in a specific section? Skip ahead below:
- What is a stipend for health insurance?
- Who is a stipend good for?
- What is a health reimbursement arrangement?
- Who is a health reimbursement arrangement good for?
What is a stipend for health insurance?
First, let’s talk about health stipends. One way for SMBs to help workers cover health costs is to offer a health insurance stipend, which is simply extra money in an employee’s paycheck.
This stipend is the equivalent of simply grossing up wages—it’s a flat amount given to all employees, which they can spend however they choose. While an employer may ask employees to spend the money on health insurance, they can’t require employees to do so. Employers also can’t require employees to provide proof that they purchased a health insurance policy.
It’s important to note that the money for the insurance stipend is treated as taxable income for the employee. In addition, employers must also pay payroll taxes on reimbursements.
Who is a stipend good for?
While health insurance stipends come with some extra taxes, they can be a good option for organizations that have a lot of employees who qualify for premium tax credits.
With premium tax credits, also known as health insurance premium subsidies, individuals can receive a discount on their individual health insurance plan. However, if the employee is offered an HRA, they may have to either reduce their tax credit by their allowance amount, or opt out of it altogether in order to participate in the HRA.
With a stipend, employees can participate both in their employer’s benefit offering and collect their full premium tax credit. Stipends are also a good option for employers who don’t want to deal with the administrative burden and compliance considerations that come with group health plans.
What is a health reimbursement arrangement?
Another alternative to group health insurance is an HRA. Health insurance stipends may be straightforward to set up, but the fact that they’re taxable is an understandable downside for many employers.
This is why many SMBs opt for a tax-free option, such as an HRA. Through an HRA, employers offer a tax-free allowance for their employees to spend on their individual health insurance premiums and qualifying medical expenses. The funds can only be used on qualifying forms of insurance and healthcare expenses.
Who is a health reimbursement arrangement good for?
There are several different types of HRAs that are a good fit for businesses of all sizes. For example, the qualified small employer HRA (QSEHRA) is designed specifically for employers with fewer than 50 employees.
Another option is the individual coverage HRA (ICHRA) that works for businesses of all sizes, and allows for additional customization with class sizes. For example, if you want to offer a group plan to some employees and an HRA allowance to the rest, an ICHRA makes that possible.
Finally there’s the group coverage HRA (GCHRA) that is meant to be paired with a traditional group health insurance plan. This is a good option for employers with a high deductible health plan that are looking to help cover the out-of-pocket costs that aren’t fully paid for by the group plan.
Whether you choose a taxable health insurance stipend or a tax-free reimbursement arrangement, there are several personalized benefits options available to you as a small or medium sized business owner that makes offering health benefits affordable, flexible, and easy to administer.
PeopleKeep specializes in personalized benefits like these and helps thousands of organizations manage their benefits in just minutes each month. Schedule a call with one of our personalized benefits advisors to get started today.
This article was originally published on October 21, 2013. It was last updated January 14, 2022.