For many small and medium-sized businesses (SMBs), offering a traditional group health insurance plan is an expense they simply can't afford. Luckily, other more affordable and flexible options make offering health insurance possible.
A common question we 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 review taxable health stipends and tax-free reimbursement plans as alternatives to group health insurance so you can decide which is best for your organization.
See the difference between offering stipends and HRAs with our comparison chart
What is a stipend for health insurance?
First, let's talk about health stipends. One way SMBs can help workers cover the cost of health insurance and other out-of-pocket expenses 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. In general, while an employer may ask employees to spend their funds on health insurance, they can't require employees to do so.
However, with benefits administration software like PeopleKeep, employers can set up and manage stipend reimbursements for medical expenses. This ensures that your employees only use their payment amounts for the health expenses you allow. That way, your employees can't use those extra funds for leisure activities or utility bills unless you specifically design custom expense categories for health-related activities.
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.
Stipends for medical expenses can be an excellent benefit for employees who are looking for increased flexibility and personalization. This is because employees can choose which eligible expenses they want to have reimbursed.
According to our 2022 Employee Benefits Survey Report, 65% of employees surveyed said they value being able to choose their own benefits. Additionally, 87% of employees said they value employer-sponsored health benefits.
Who is a stipend good for?
While health insurance stipends come with extra taxes compared to HRAs, they can be a good option for organizations with many 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 plans. 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 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 traditional group health insurance plans.
If you want to offer a health benefit to your 1099 contractors or international workers to promote retention, a stipend can help.
Taxable stipends are also an excellent option for organizations that want to offer an allowance for health benefits that HRAs and traditional group health insurance don't always cover, such as mental health benefits. According to our Benefits Survey Report, 63% of employees value mental health benefits, yet only 5% of employers offer any. Offering a stipend for mental health benefits can be a great addition to your compensation package.
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 can be a downside for many employers. Stipends also don't work for organizations with 50 or more full-time equivalent employees (FTEs), as it isn't a formal health benefit that meets the Affordable Care Act’s standards for applicable large employers (ALEs).
This is why many employers 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.
What type of HRA is best for your organization?
Several different types of HRAs are a great fit for organizations 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), which 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), also known as an integrated HRA. This is meant to be paired with a traditional group health plan. This is a good option for employers with a high deductible health plan (HDHP) that are looking to help cover the out-of-pocket costs that aren't fully paid for by the group plan.
Conclusion
Whether you choose a taxable health insurance stipend payment or a tax-free reimbursement arrangement, several personalized benefits options are 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 with ease. With our HRA and employee stipend benefits administration software, you can set up and manage personalized benefits in just minutes each month.
You can offer perk stipends for health, wellness, remote work, and other areas of your choice. And you can completely customize the categories and stipend amounts you'd like to offer to employees. With WorkPerks, your benefits possibilities are endless.
This blog article was originally published on October 21, 2013. It was last updated on October 11, 2022.
