When a small employer cannot afford to offer formal health insurance, it provides an employee with a taxable stipend to use toward health insurance. This option can save time and money, but since the health insurance stipend is viewed as part of an employee's income, rather than a separate benefit, the dollars are less valuable.
Stipends may be subject to income taxes and payroll taxes, unlike tax-free health benefits. Furthermore, employers are not allowed to ask employees to prove they purchased insurance with the money they received as a stipend.
Could getting a health insurance stipend be worth it after all? The following article examines the pros and cons of taxable health insurance stipends, outlines best practices, and suggests a tax-free method of offering insurance to your employees.
What are the workings of a health insurance stipend?
An employee who receives a health insurance stipend is offered a fixed, taxable amount to purchase individual health coverage. If you offer your employees this option, you can save yourself the cost of group health insurance by not paying for all of them, which is more cost effective for you considering healthcare costs are on the rise. Contributions from the employer are usually included in the employee's salary.
Health insurance stipends have many advantages
There are several advantages to receiving a stipend. Employees will also have the opportunity to compare health insurance plans and find the one that best meets their needs and those of their families.
It might make sense to offer your employees a health insurance stipend if...
Formal group health insurance is not an option for you.
IRS, HIPAA, and ERISA compliance and regulation concerns are not something you want to have to worry about.
Simple automatic payroll additions are what you're looking for.
Health insurance stipends have cons
Employees are not required to purchase health insurance when they receive a stipend. The stipends you give your employees can be used for health insurance and other medical expenses, but cannot be guaranteed.
Furthermore, if employees consider the stipend a part of their salaries, and you later decide that the stipend has to go, they might perceive this as a pay cut and become less motivated.
Health insurance stipends have other cons as well:
Payroll tax must be paid by employers on reimbursements of 7.65%.
(Social Security 6.2%, Medicare 1.45%)
Most employees pay 20% to 40% tax on their income.
It may not achieve your intended objective of offering a health benefit since you cannot require employees to submit proof of coverage.
Stipends may not be viewed by many prospective employees as a real benefit package, which may turn them off.
Stipends for health insurance: best practices
Following local tax laws makes stipends legal. Formerly, stipends were commonly used negatively; today, they're typically used in conjunction with proper pay as a bonus. Stipends should never be used to exempt employees from salaried work, whether they are part-time or full-time.
Following are three things to consider when providing employees with health insurance stipends:
Do not request proof of health insurance from employees.
If companies ask for proof of health insurance coverage, they may be subject to penalties. Direct payments are considered employer payment plans.
The stipend should be treated as taxable income.
Be sure to remind employees that the health benefit stipend is intended for them. Then, employees can use it for medical purposes instead of just thinking of it as additional income
HRAs versus stipends
Payroll and income taxes apply to stipends, so employer dollars don't stretch as far as they could. Tax-free reimbursement is provided by a health reimbursement arrangement (HRA), which is an employer-paid benefit that reimburses workers for their out-of-pocket healthcare expenses.
Due to their improved budget control and tax benefits, employers prefer HRAs over healthcare stipends. Depending on your business needs, you can offer your employees a tax-free allowance every month. Allowances cannot be exceeded once set.
The employee chooses the insurance and services he or she wants and pays for them themselves. Employers reimburse employees for eligible expenses after verifying the receipts submitted by employees.
HRAs also have the following pros:
There is no tax on them. Employers and employees are both exempt from payroll taxes on reimbursements. Employees who have minimum essential coverage (MEC) are also exempt from income taxes.
Medical expenses must be covered by the employees. Expenses eligible for reimbursement from an employer under IRS publication 502 can only be paid with the funds. The employer can design plans with further restrictions on reimbursement.
Implementing them is easy. Benton Oakfield, for instance, can offer an administration software that facilitates expense submissions and reimbursements completely compliant and intuitively. The expense documentation is reviewed by a team of experts to ensure that only eligible expenses are reimbursed.
Top talent is attracted and retained by them. HRAs provide a quality health benefit at a low cost to small and medium sized companies.
Depending on your company's size, type of group insurance, and budget, Benton Oakfield has HRAs for you: the qualified small employer HRA (QSEHRA), individual coverage HRAs (ICHRAs), and group coverage HRAs (GCHRAs). Benton Oakfield makes benefit management simple, so you can focus on growing your business instead of taking care of HR affairs.
In the past, health insurance stipends have been one way employers helped employees pay for their insurance. It is a cost-effective and easy to administer tool, but employees may treat it like a regular bonus if it is subject to taxes. Whenever you have concerns that your employees won't use the stipend you provide for health insurance, you might want to take a look at other health insurance options, such as a health reimbursement arrangement (HRA).
Health reimbursement arrangements are a tax-free way to reimburse employees for their healthcare costs, but they can only be used to reimburse insurance premiums. You can schedule a call with a Benton Oakfield personal benefits advisor if you think HRAs are the right choice for your organization.
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