Should I Offer A Healthcare Stipend to my Employees?

Are you considering a healthcare stipend for employees? While stipends may seem appealing, there are tax implications for both the business and the employee. To make the most of your budget, give tax-friendly HRAs a look before settling on a healthcare stipend.

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This post covers:

• What is a healthcare stipend and how does it work?
• Types of healthcare stipends
• Pros and cons of healthcare stipends
• How much is a typical monthly healthcare stipend?
• Are healthcare stipends taxable?
• Cost Comparison: Healthcare stipend vs. HRA
• Opting for an HRA
• HRA Resources
• Run the Numbers

What is a healthcare stipend and how does it work?

A healthcare stipend is a predetermined sum of money that employees can use to purchase health insurance or cover medical expenses. It's important to note that a stipend is not equivalent to health insurance, although employers have the intention that their employees will use the stipend to obtain medical coverage.

A healthcare stipend can be added to an employee’s paycheck or given as a separate payment made monthly, quarterly, or annually. Most companies take care of this through expense reimbursements.

Types of Healthcare Stipends

Medical stipends 

A medical stipend is a predetermined amount of money that employees can use to buy health insurance or pay for medical expenses.

Prescription drug stipends

A prescription drug stipend is a budget set aside for employees to use to help cover the costs of their prescriptions. 

Mental health stipends 

A mental health stipend is an earmarked amount that employees can use toward mental health services.

Wellness stipends

Also referred to as a wellness spending account or wellness allowance, wellness stipends allow employers to set aside funds to go toward wellness services or products for their employees. This could be a gym membership, acupuncture, counseling, or weight-loss programs.

Pros and Cons of Healthcare Stipends 

Pros of a Healthcare Stipend

• Healthcare stipends aren’t subject to group insurance compliance requirements
• They can be easy to administer through payroll
• They can have a low admin burden 

Cons of a Healthcare Stipend 

• Healthcare stipends are considered considered taxable income, so the true value of the stipend amount will be diminished after taxes are taken out
• Writing off the stipend as a business expense will have payroll as well as income tax implications
• There's no easy way to ensure that stipend is spent on what it is supposed to; you're legally not allowed to ask
• Healthcare stipends don't meet the Employer Mandate for companies with more than 50 employees

How much is a typical monthly healthcare insurance stipend? 

The amount of a health insurance stipend can vary widely based on several factors, including the employer's policies and the specific circumstances of the employee. There is no fixed amount for a health insurance stipend, as it depends on the employer's budget, goals, and the design of the benefits program. Here are some considerations that can influence the amount of a health insurance stipend:

1. Employer's Budget: The employer's financial resources play a significant role in determining the size of a health insurance stipend. Larger organizations with more financial resources may offer larger stipends.

2. Employee Classification: Employers may offer different stipend amounts based on the employee's role, seniority, or job classification. For example, managers or full-time employees might receive higher stipends than part-time or entry-level employees.

3. Cost of Health Insurance: The cost of health insurance plans can vary greatly depending on the type of plan, the level of coverage, and the region. Employers may base stipends on the actual cost of health insurance premiums or a percentage of it.

4. Employee Contribution: Employers may offer stipends to cover a portion of the employee's health insurance premiums, leaving the employee responsible for the remaining portion. The stipend may be a set dollar amount or a percentage of the total premium cost.

5. Plan Selection: If employees have a choice of health insurance plans, the stipend amount may vary depending on the plan selected. Some employers offer a tiered stipend structure, with different amounts for different plan options.

6. Legislation and Regulations: Employers must also consider relevant regulations, such as those under the Affordable Care Act (ACA), which may affect stipend amounts. For instance, the ACA sets guidelines for affordability, and employers must ensure that their stipend offerings comply with these rules.

7. Competitive Practices: Employers often assess the stipends offered by competitors in the same industry or region. To attract and retain talent, they may adjust stipend amounts to stay competitive.

8. Employee Input: Employers may seek feedback from employees to understand their needs and preferences regarding stipend amounts. This can help tailor the stipend program to employee expectations.

9. Geographic Location: The cost of living can vary significantly by location. Employers in high-cost areas may offer larger stipends to offset the higher cost of living and health insurance.

In summary, the amount of a health insurance stipend is highly variable and depends on several factors. It is determined by the employer's budget, compensation philosophy, and the cost of health insurance in the specific location. Employers typically make an effort to strike a balance between offering a stipend that provides meaningful support for employees' health coverage while managing their overall benefits budget effectively.

Are health insurance stipends taxable?

Let's take a look at the tax implications of healthcare stipends (sometimes called health [insurance] stipends, medical stipends, or premium stipends).

Yes, healthcare stipends are taxed. That diminishes the benefit of stipends because they are subject to payroll and income taxes, so employees never see 20-40% of the designated amount.

One of the main reasons we recommend an HRA instead of a healthcare stipend is for the tax benefits, which typically benefit both employer and employee. 

Read: Are Employee Stipends Taxable?

Now, let’s see how HRAs stack up against healthcare stipends.

Cost Comparison: Health stipend vs. HRAs

Now let's compare a healthcare stipend to reimbursing for premiums through an HRA.

Steph runs a 10-person company and offers employees a $300 monthly healthcare stipend, totaling $3,000 per month. Steph will pay a 25% employee income tax ($750/month) plus a 15% employer payroll tax ($450/month), totaling $1,150 in taxes for her healthcare stipend.

Jeff also runs a 10-person company, but he offers reimbursement through an HRA. Because HRAs don’t carry the tax burden of healthcare stipends, Jeff avoids employee income tax and employer payroll tax, saving $1,150/month. Jeff’s employees benefit from the tax advantages of HRAs by getting to use the full value of his contributions for their health insurance and medical expenses.

An HRA also allows Jeff to keep the unused funds at the end of the year since HRAs are only paid out when employees submit a claim for reimbursement.

→ More on how health insurance reimbursement works

Opting for an HRA instead of a healthcare stipend

If you want to attract and retain employees by offering health insurance, HRAs typically offer a huge tax advantage. 

Here's why reimbursing employees for health insurance wins from a tax perspective:

Sometimes referred to as “401(K)-style” insurance, HRAs allow an employer to reimburse for medical expenses and/or insurance premiums on a tax-free basis. Under this arrangement, employees purchase their own health insurance on the open market and then submit claims to their employer to get reimbursed for the cost of their premium and if allowed, all qualified medical expenses.

HRA Resources

Here's the gist.

• The qualified small employer HRA (QSEHRA) requires your business to be small, with less than 50 Full Time Equivalent employees, and you can't offer a group plan at the same time. If you meet those qualifications, you can use an HRA administration tool (like ours!) to create your QSEHRA, decide how much you’ll reimburse each month (up to the contribution limits), let your employees choose the plan that works best for them, and reimburse them when they submit receipts! Learn more about QSEHRA administrators here.
• The individual coverage HRA (ICHRA) is almost like a “super-charged” version of the QSEHRA. Instead of being capped at 50 employees, employers of any size can set up an ICHRA for their teams. There are also no contribution limits with this HRA. Another key differentiator from HRAs in the past? ICHRA allows business owners to customize their reimbursements across different classes of employees. While everyone must be treated fairly within a certain class, reimbursement rates can vary between full time, part time, seasonal, remote, etc. Here's what to look for in an ICHRA administrator. 

ICHRAs have grown 3.5x in the past year and QSEHRAs have doubled in size on the market during that same time period, according to the HRA Council. 

Run the Numbers: How much can you reduce benefit costs?

Calculate your HRA tax savings and see just how much you can save or see how Take Command's HRA administrator software might work for you. Learn more about the reimbursement rules for QSEHRA. Or settle in for some comprehensive reading about ICHRA. 

We are always available to chat online - please reach out! Or, we have lots of resources to help guide you, and we've written a slew of blog posts all about HRAs. Here's a step by step guide to how HRAs work. We also have a comprehensive guide to small business HRAs  and a page dedicated to all things HRA administrators.

This post was originally published in 2020 and has been updated with new information and insights for 2025.