Health Insurance Stipends: What You Need To Know
Many employers care about their workers health and want to offer insurance but simply can’t afford to. Some offer a taxable health insurance stipend that employees can use towards their healthcare expenses as a compromise.
While this may seem like an easy option, there are a few caveats to stipends. Let’s take a look at everything you need to know about healthcare stipends.
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How Do Health Insurance Stipends Work?
Employers provide their workers with a taxable stipend of a set amount, usually as part of the employee’s wages on their paycheck. As an alternative, a stipend can be provided via a lifestyle savings account (LSA) or an expense card. The last option is to reimburse workers for their healthcare costs directly.
The goal of the stipend is for employees to purchase their own individual insurance plans. Employees can choose whichever insurance plan best meets their needs. They can also use the money on other out-of-pocket expenses.
Benefits of a Health Insurance Stipend
Health insurance stipends are a unique benefit to offer to employees and come with many advantages. Employees aren’t stuck with a single group health plan. Instead, they can shop around and compare plans to find one that meets their needs.
Stipends are also beneficial if you have international workers or 1099 contractors. You can provide a desirable benefit without affecting these workers’ employment status.
Stipends are also fully customizable. There are no contribution limits, so you can choose an amount that meets your employees’ and your business’s needs.
If you are considering offering a health insurance stipend, there are a few situations where this would be a suitable option. If your business cannot afford to offer an organized group plan, a stipend can allow you to offer the benefit without the extra cost. Stipends are also ideal because you don’t need to deal with compliance concerns and regulations stemming from HIPAA, the IRS, and ERISA.
This is also something to consider if you want an option that is easy to manage and straightforward. You can run stipends through automatic payroll changes, which makes it simple, even if you don’t have payroll assistance.
Finally, businesses that have employees who are eligible for advance premium tax credits (APTC) can help offset healthcare expenses without affecting the receipt of these credits.
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Downsides of a Health Insurance Stipend
Unfortunately, there are some downsides to health insurance stipends. While these stipends are intended for use to purchase health insurance and related care, there’s no guarantee that they will. You cannot require proof of insurance and will need to have confidence that your employees use it as such.
Since stipends are paid as part of a paycheck, they are subject to the same taxes as other income. This means employers are required to pay 7.65% of the amount towards payroll tax. In addition, employees are charged income tax (usually 20% to 40%) on stipends received as income.
If you later need to remove the stipend, it could lower employee morale. Many employees view their stipends as a portion of their pay, so lowering or removing them might be seen as a cut to their paycheck.
Finally, although it functions as a benefit to employees, some prospective employees may not see it as part of a total benefits package. It, therefore, may not serve as well to attract talent as a true health insurance plan.
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Comparing Stipends and Health Reimbursement Arrangements
An alternative to an insurance stipend is a health reimbursement arrangement (HRA). These are IRS-approved, tax-free health benefits that allow employers to reimburse employees for qualifying out-of-pocket medical expenses, including individual health insurance premiums. Employers can choose from a few different kinds of HRAs. The most popular options include the group coverage or integrated HRA (GCHRA), the individual coverage HRA (ICHRA), and the qualified small employer HRA (QSEHRA).
While these have similar goals as a stipend, HRAs have a few advantages over stipends. First, they are payroll tax-free for both employers and employees. As long as the employee has minimum essential coverage, HRAs are also income-tax-free.
With HRAs, employers can set an allowance each month. Employees can then get reimbursed only for eligible medical expenses listed under IRS Publication 502.
More employees see HRAs as a formal benefit than stipends. Because of this, it may be a good way to attract quality talent.
Overall, this type of arrangement offers a similar function as a stipend but with additional benefits.
Best Practices for Stipends
If you choose to offer health insurance stipends, you must make sure you comply with the tax laws in your state and the local area.
Remember, stipends are a bonus on top of regular pay. You cannot use it to exempt either full-time or part-time employees from a salaried position. In general, treat the stipend as taxable income.
You cannot ask employees to show proof that they have health insurance coverage. Both direct payment and direct reimbursement are considered to be employer payment plans. If you ask for verification, your business could be subject to financial penalties.
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You can encourage its use toward health care costs. Try to continuously communicate that the stipends are meant to be used as a healthcare benefit. Employees may be more likely to apply it to health care costs as opposed to simply extra pay.
Since one of the downsides of stipends is that prospective employees don’t see it as much of a benefit, we recommend making it more attractive. The easiest way to do this is by creating a small package of related benefits to make your offer seem more robust.
For example, you can show that you care about health insurance coverage by offering a stipend. But you can pair that with coverage for health-related technology or even a gym membership. Even small additions like this can make a difference.
Is a Health Insurance Stipend Right for Your Business and Employees?
A health insurance stipend can be an easy and affordable way to offer health care benefits to your employees. Depending on your workers and your situation, it may be the preferred option. However, it is important to consider many factors when deciding if a health insurance stipend is best for you.
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