Health insurance stipends pros and cons

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Published connected March 27, 2023.

Many mini employers who can't spend to connection general wellness benefits whitethorn determine to springiness labor a taxable stipend to salary for healthcare expenses. While this action is easy to administer and tin prevention employers time, nan worth of a stipend is reduced because itis considered portion of employees' income—not a abstracted benefit.

This intends that stipends person payroll and income taxation implications that tax-free wellness benefits don't have. Moreover, employers can't require labor to beryllium they purchased a wellness security scheme pinch their stipend money.

So are wellness security stipends a worthwhile action aft all? In this article, we'll analyse nan pros and cons of taxable wellness security stipends, outline champion practices, and talk a tax-free measurement to connection your labor wellness insurance.

Learn much astir really worker stipends activity pinch our complete guide

How does a wellness security stipend work?

With a wellness security stipend, labor person a fixed, taxable allowance to acquisition an individual wellness plan and different out-of-pocket aesculapian costs.

This allows you to springiness them nan action of choosing an security argumentation of their prime without having to ft nan measure for accepted group wellness security for each your employees, which tin beryllium much cost-effective for you considering rising healthcare costs.

Employer contributions are paid straight connected an employee's paycheck for illustration other wages. You tin connection a stipend arsenic a monthly allowance done an disbursal paper aliases a lifestyle spending account (LSA), aliases you tin reimburse your labor for their wellness expenses.

Pros of a wellness security stipend

A stipend tin connection immoderate unsocial advantages. Among different benefits, labor will beryllium capable to take from aggregate wellness sum options. They tin comparison and find nan argumentation that champion suits their needs, whether connected a nationalist exchange, for illustration nan health security marketplace, aliases a private exchange.

A wellness stipend besides allows you to supply a use to international workers and 1099 contractors without affecting their employment status. Since a stipend isn't a general wellness benefit, you tin afloat customize your stipend amounts to your organization's needs without immoderate publication minimums aliases limits.

A wellness security stipend could beryllium a bully thought for your business if:

  • You can't spend to connection general group wellness coverage.
  • You want to debar immoderate compliance aliases regularisation considerations pinch nan IRS, HIPAA, aliases ERISA.
  • You want thing elemental and easy to negociate done automatic payroll additions.
  • You person labor who person advance premium taxation credits (APTC) for individual wellness security premiums.

Cons of a wellness security stipend

With a stipend, there's nary request that labor request to usage nan money to acquisition wellness insurance. You whitethorn spot that your labor will usage nan stipends for wellness security and different aesculapian expenses, but you can't guarantee they will.

In addition, if labor position nan stipend arsenic portion of their wages, and you later determine to region it, they mightiness spot it arsenic a salary cut. Doing this could little morale.

Other cons of a wellness security stipend see nan following:

  • Employers must salary payroll taxation connected reimbursements totaling 7.65%.
    • (6.2% for societal information and 1.45% for Medicare)
  • Employees must salary taxes connected nan amounts received arsenic income, usually betwixt 20% to 40%.
  • You can't require labor to taxable impervious of insurance, truthful it whitethorn not execute your intended nonsubjective of offering a wellness benefit.
  • Because they’re taxable, galore prospective labor whitethorn not spot a stipend arsenic an existent “benefit,” which could move disconnected nan very group you hoped to attract.

Best practices for wellness security stipends

Stipends are ineligible erstwhile you travel nan taxation laws successful your area. In galore cases, they are typically utilized arsenic an other perk alongside due worker salaries.

As a wide rule, you should ne'er usage stipends arsenic a measurement to exempt an employee, either part-time aliases full-time, from a salaried position.

When offering labor a wellness security stipend, present are 3 champion practices to consider:

  • Don't inquire labor to show impervious of wellness insurance.
    • Direct costs aliases nonstop reimbursement for wellness security is considered an employer costs plan, and nan business could look penalties for asking for verification.
  • Treat nan stipend arsenic taxable income.
  • Continuously pass to labor that nan stipend is simply a wellness benefit. This way, labor will beryllium much apt to usage it for aesculapian reasons and not simply see it arsenic other wages.

While a stipend isn't a general wellness security policy, location are ways to guarantee that your labor usage their allowance arsenic you intend.

With an worker benefits management level specified arsenic PeopleKeep, you tin negociate your stipend and group which expenses are eligible for reimbursement. That way, your labor will beryllium much apt to only usage their allowances connected healthcare costs.

Stipends vs. wellness reimbursement arrangements (HRAs)

As mentioned, stipends are taxable to payroll and income taxes, meaning employer dollars don't agelong arsenic much. Thankfully there's a tax-free replacement to stipends.

A health reimbursement arrangement (HRA)is an IRS-approved, employer-funded wellness use meant to reimburse employees, tax-free, for qualifying out-of-pocket aesculapian expenses and individual wellness security premiums.

Many business owners for illustration HRAs complete healthcare stipends for their taxation advantages. You find really overmuch tax-free allowance you want to connection your labor each month. Once you group an allowance, your reimbursement amounts can't transcend it.

Employees take nan security and services they want and acquisition them pinch their ain money. They past taxable impervious of a purchased eligible expense, usually successful nan shape of a receipt, and are reimbursed by nan employer aft nan disbursal is verified. Unlike health savings accounts (HSAs), unused HRA costs enactment pinch you if an worker leaves your organization.

Other pros of an HRA are:

  • They person taxation benefits. Reimbursements are free of payroll taxes for some employer and employee. They're besides free of income taxes arsenic agelong arsenic nan worker has minimum basal coverage (MEC).
  • They require labor to usage nan money for aesculapian expenses. Employees tin only usage nan costs for eligible expenses nether IRS Publication 502. Employers tin creation plans that restrict reimbursable expenses further.
  • They're easy to implement. Companies for illustration PeopleKeep person afloat compliant and intuitive management software to facilitate disbursal submission and reimbursement. A squad of experts reviews each disbursal archiving to guarantee you only reimburse labor for eligible expenses.
  • They thief you pull and clasp apical talent. HRAs let mini and medium-sized organizations to connection a value wellness use without breaking nan bank.

PeopleKeep offers HRAs that activity for immoderate employer, sloppy of your organization's size, group security status, aliases budget.

Three of nan astir celebrated types of HRAs include:

  • The qualified mini employer HRA (QSEHRA)
  • The individual sum HRA (ICHRA)
  • The group sum HRA (GCHRA), besides known arsenic an integrated HRA
    • This is an HRA that tin activity pinch accepted group wellness insurance


All wellness benefits person their pros and cons. Stipends are 1 measurement to thief labor pinch nan costs of wellness security coverage. They're cost-effective and easy to administer but are taxable to taxes, and labor whitethorn dainty them arsenic a regular bonus. However, HRAs are tax-free and tin only beryllium utilized connected security premiums and different aesculapian expenses.

While each is simply a elastic action successful lieu of group wellness insurance, cautiously see your organization’s circumstantial needs and what’s champion for your labor earlier you get started.

If you judge an HRA aliases wellness stipend is nan correct prime for your organization, schedule a telephone pinch a personalized benefits advisor, and we'll get you connected your way

This blog article was primitively published connected August 25, 2020. It was past updated connected March 27, 2023.

Originally published connected March 27, 2023. Last updated March 27, 2023.

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