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 may wonder what a healthcare benefit allowance is and how they can make it part of their employee benefits package.
In this article, we'll explain what benefit allowances are, the differences between various healthcare benefit allowance types, and how each allowance works.
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What is a benefit allowance?
A benefit allowance is an amount of money provided to an employee for a specific benefit purpose, such as healthcare, wellness, or transportation. Employers can provide these allowances 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 such as employer healthcare arrangements1 or employer payment plans.
Although many names exist for a formal employer payment plan with legal plan documents, the most common term is a health reimbursement arrangement (HRA).
However, there's also a type of healthcare benefit allowance that doesn't require plan documents, which is a health stipend.
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, depending on the type of HRA offered.
Here's how it works: First, employers decide on an annual or monthly 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.
Depending on the HRA, employers can choose to reimburse their employees for insurance premiums and out-of-pocket expenses or just limit reimbursements to monthly 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 medical services they want. They can easily compare policies and purchase their own coverage through the federal Health Insurance Marketplace.
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 a health benefit. This stipend comes with fewer regulations than HRAs or group health insurance, making it an extremely flexible benefit.
Employers decide on an annual, quarterly, or monthly payment allowance for medical expense reimbursement, like an HRA. They also have complete control over what eligible expenses you want to reimburse, such as out-of-pocket costs 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 financial assistance for health insurance through premium tax credits, as they won't have to waive their credits to take advantage of the health benefit.
However, stipends don’t satisfy the Affordable Care Act’s employer mandate for organizations with 50 or more full-time equivalent employees (FTEs). Employers also can’t require proof of coverage or ask for receipts for items listed in IRS Publication 502. This makes an HRA a better option for most organizations.
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. This benefit can help employees save significantly on their medical expenses, but often the one-size-fits-all nature of the plan doesn't work for every employee. Employees are left with a deductible, copay amount, 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 with their preferred providers and use the allowance allotted to cover medical services unique to them. IRS Publication 502 contains a full list of healthcare expenses that can be reimbursed with an HRA.
HRAs aren't only an alternative to group health insurance. Some HRAs, such as an integrated HRA, can be offered alongside a group health insurance plan to cover employees’ out-of-pocket healthcare costs. We'll cover these options below.
Types of HRAs
This section will cover three of the most common types of HRAs available. 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 FTEs. All full-time employees are automatically enrolled. This means employees who receive premium tax credits can't choose to opt-out of the benefit in order to collect their full premium tax credit. Those employees must reduce their credit, dollar-for-dollar, by their monthly HRA allowance.
Employers can choose whether to include part-time employees in the benefit but must offer the benefits on the same terms to all employees if they decide to include their part-timers.
The QSEHRA is a great option for employers who want to save on health benefits costs and get maximum value out of their spending since there's no minimum limit for employer contributions. However, there are annual contribution limits with a QSEHRA. Every year, the IRS outlines these annual contribution limits through a revenue procedure.
Organizations of any size can offer an ICHRA. Employers can set eligibility requirements and allowance amounts according to employee classes. Plus, there are no caps on annual allowance amounts with an ICRHA like there are with a QSEHRA.
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 health insurance premiums and qualified out-of-pocket medical expenses (if their employer allows it).
An ICHRA can also help employers with more than 50 FTEs, known as applicable large employers (ALEs), meet all of the requirements of the ACA employer mandate.
With an ICHRA, your employees who receive financial assistance through premium tax credits have to choose between one or the other. If they are offered an ICHRA allowance that is considered affordable, they must forego their premium tax credits. However, if they are offered an unaffordable allowance, they can opt-out of the ICHRA and continue receiving their tax credits.
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 plan of their choosing and extend their employees' healthcare 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.
If you want to avoid the high price tag that comes with working with a traditional health insurance company, 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 talented 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 benefits solutions for every organization.
Schedule a call with a personalized benefits advisor to discuss the options available for your business!
This blog article was originally published on March 26, 2013. It was last updated on May 23, 2023.