The term healthcare benefit allowance is frequently mentioned when discussing non-traditional health benefit options. Employers searching for an alternative to traditional group health insurance plans often ask us what a healthcare benefit allowance is, and how they can add it to their employee benefits package.
In this article, we’ll define what benefit allowances are as well as explain the differences between healthcare benefit allowance types and how each allowance works:
- What is a benefit allowance?
- How an HRA works
- HRA vs. health stipend allowance
- Why offer a health allowance instead of a traditional group health insurance plan?
- Types of HRAs
What is a benefit allowance?
First, let’s define what a benefit allowance is. A benefit allowance is any payment provided to an employee for a specific benefit purpose, such as healthcare, wellness, or transportation costs. Employers can pay these separately or through an employee’s paycheck.
A healthcare benefit allowance is any payment by an employer for an employee’s healthcare expenses. It’s a broad name for plans known as employer healthcare arrangements or an employer payment plan.
However, there’s also an additional type of healthcare benefit allowance that doesn’t require plan documents, known as health stipends.
How an HRA works
The first type of healthcare benefit allowance we’ll cover is an HRA. Employers can use HRAs to create a flexible health benefit that fits almost any budget. An HRA can work either as a stand-alone benefit or alongside group health insurance.
Here’s how it works: First, employers decide on a monthly or annual allowance that they’ll make available to employees for medical expense reimbursement. Any unused portion of the allowance at the end of the year stays with the employer.
Employers can choose to reimburse their employees for insurance premiums and out-of-pocket expenses or limit reimbursements to insurance premiums. Employees can then use their allowance to get reimbursed for eligible medical expenses allowed by the HRA.
This gives employees the freedom to choose the insurance plans, healthcare products, and services they want.
HRA vs. health stipend allowance
HRAs aren’t the only type of healthcare benefit allowance available. Employers can also use a health stipend to create health benefits. These stipends come with fewer regulations than HRAs or group health insurance, making them an extremely flexible benefit.
Employers decide on a monthly or annual allowance for medical expense reimbursement, like an HRA. You also have complete control of what expenses you want to reimburse your employees, such as out-of-pocket expenses or premiums.
Unlike HRAs, health stipends are counted as taxable income for your employees. You’ll also have to pay payroll taxes.
Due to the taxable nature of health stipends, they’re best for businesses with employees who receive premium tax credits, as they won’t have to waive their credits to take advantage of the health benefit.
Why offer a health allowance instead of a traditional group health insurance plan?
Traditionally, the most common health benefit offered by employers is group health insurance. It can help employees save significantly on their medical expenses, but often the one-size-fits all nature of the plan doesn’t work for all employees. Employees are left with a deductible, network, and provider they didn’t choose.
Group health insurance is also costly for employers, and these costs are sometimes passed down to employees.
Health allowances such as HRAs or health stipends offer a formal health benefit while giving employers full control of their expenses. Employees aren't tied to a specific group insurance plan with a qualified small employer HRA (QSEHRA), individual coverage HRA (ICHRA), or a health stipend. Instead, they get to choose their own insurance plan and use the allowance to cover medical costs unique to them.
HRAs aren’t only an alternative to group health insurance. Some HRAs can be used alongside a group health insurance plan as an additional option for those who don’t qualify or aren’t offered the group plan. Others supplement the plan like an HSA. We’ll cover these options below.
Types of HRAs
This section will cover three of the most common types of HRAs available. Each of these options can provide personalized health benefits to your employees instead of or in addition to a group health insurance plan.
A QSEHRA can only be offered by employers with fewer than 50 full-time equivalent employees (FTEs) and all full-time employees are automatically enrolled without having to opt-in.
Employers can choose whether to include part-time employees in the benefit, but don’t have the option to group employees into classes like an ICHRA.
Though it can’t be offered alongside group health insurance, it can be a great alternative for employers looking to save and create maximum value out of their spending.
Organizations of any size can offer an ICHRA. Employers can decide which employees can participate and customize allowance amounts by grouping them into classes.
To participate in an ICHRA, employees must be covered by an individual health insurance plan that qualifies as minimum essential coverage. Employees can then use the allowance to cover insurance premiums and qualified out-of-pocket medical expenses (if their employer allows it).
Group coverage HRA (GCHRA)
A group coverage HRA (GCHRA), also known as an integrated HRA, is designed to supplement a group health insurance plan. To participate, employees must be enrolled in their employer’s group health insurance plan and can only use their allowance toward out-of-pocket medical expenses—not insurance premiums.
A GCHRA allows employers to offer a group health insurance plan of their choosing and extend their employees’ coverage through an additional allowance. Employees use their GCHRA allowance to cover out-of-pocket costs before meeting their annual out-of-pocket maximum and provide an extra level of budget control for employers.
HRAs and health stipends are great options for businesses looking to implement a healthcare benefit allowance into their employee benefits package. Health stipends give employers more freedom to personalize their benefits, while HRAs are federally recognized and tax-advantaged.
With health benefit allowances, most employers can set an allowance that fits their budget and meets their employees’ needs. In the modern workforce, health benefits have become necessary to attract and retain the right employees.
If you’re looking to implement a personalized health benefit, PeopleKeep has several options to fit your organization’s needs. From HRA administration software to customizable employee stipends through WorkPerks, we have a benefit platform for every organization.
This blog article was originally published on March 26, 2013. It was last updated on March 8, 2022.