Should I Offer A Stipend In Lieu Of Health Insurance?

Looking to offer a stipend in lieu of health insurance? While insurance stipends or health care stipends may seem like a good idea, it's important to understand the tax implications. Before considering traditional options of offering health benefits like group plans, health stipends or pay increases, it's important to take a look at HRAs (health reimbursement arrangements.)  The key difference rests in the tax savings that accompany an HRA.

This post covers:

• What is a healthcare stipend?
• How do health insurance stipends work?
• Are health insurance stipends taxable?
• How healthcare stipends compare to HRAs
• How much is a health insurance stipend? 
• What's the difference between a healthcare stipend vs health insurance?

Let's jump in to your options and see what works best for you when considering offering a healthcare stipend. 

What is a health insurance stipend?

A healthcare stipend is a predetermined sum of money that employees can utilize to purchase health insurance or cover unforeseen medical expenses like surprise medical bills. 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.

The stipend amount provided by the employer will vary, but it can potentially cover the entire cost of an individual health plan or make a substantial contribution towards a family policy.

Why offer a healthcare stipend? 

When employers provide a healthcare stipend, they empower employees to take charge of their own health insurance decisions. The stipend amount is included in their regular paychecks, giving them the flexibility to choose a health plan that aligns with their budget and specific needs, whether it's for themselves or their families. This puts the responsibility in their hands to find the best coverage that suits them.

How does a health insurance stipend work?

Health insurance stipends are simple. An employer simply gives employees a set amount of money to go toward a given expense. The stipend can be simply added to their paycheck or as a separate payment. 

There are different ways to offer a wellness stipend for your employees depends: as a one-time stipend, or ongoing health stipend to pay out monthly, quarterly, or annually. Most companies take care of this through expense reimbursements. 

Not only are small businesses required to pay payroll tax on the stipends, employees must claim the stipend as income and there isn’t exactly any accountability for whether or not the money is even used for health insurance.

Types of healthcare stipends 

There are several healthcare stipends to consider. Here are a few popular types.

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 dollars set aside for employees to use to help cover the costs of their prescriptions. 

Mental health stipends 

With mental health being an ever-increasing priority among employers, mental health stipends can be a popular choice. The employer simply earmarks a dollar 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, weight loss programs, and more.

Health insurance stipend vs. HRA

Now let's look at offering a health insurance stipend compared to reimbursing for premiums for a health reimbursement arrangement.

Let’s say a small business owner, Steph, runs a 10 person company offering $300 a month in salary increases, totaling $3,000 per month for her team for a health stipend, which is subject to several types of taxes. In a one month period, a 25% employee income tax will run around $750, a 15% employer payroll tax runs about $450, totaling $1,150 in taxes.

Small business owner Jeff offers reimbursement through an HRA and avoids employee income tax and employer payroll tax, saving a whopping total of $1,150 per month more than Steph (roughly a 30% savings). With an HRA, employees get to use the full value for their health insurance and medical expenses.

What's more, in contrast to a health stipend that really comes with no accountability, an HRA allows small businesses to keep the unused funds at the end of the year and it's only paid out when employees submit a claim for reimbursement.

→ More on how health insurance reimbursement works

Health insurance for small employers: group plans vs stipends

For small employers evaluating small business health insurance options, 

Health vs wellness stipend

Health stipends are funds allocated to helping employees cover health expenses. These might include vision and dental premiums, prescriptions, copays, etc. It can even be used for health insurance premiums. 

Similar to a health stipend, a wellness stipend is a taxable bonus provided to employees to assist them in covering their wellness-related costs. These stipends may also be referred to as wellness spending accounts, wellness LSAs, or wellness perks.

These versatile benefits cater to the well-being of employees, focusing on their physical and mental wellness needs, excluding medical expenses that are already covered by health stipends. However, depending on the design of the benefit, they may also provide reimbursement for certain expense categories, creating a flexible and comprehensive wellness package.

In contrast to health stipends, wellness stipends typically do not include coverage for insurance premiums or out-of-pocket healthcare expenses. Instead, they focus on providing support for various activities and programs that encourage a healthy lifestyle. 

Pros and Cons of Health Insurance Stipends

Cons of a Health Insurance Stipend 

• Stipends are not tax-advantaged, meaning the value of the stipend dollars will be greatly diminished because they are considered taxable income (~30%).
• Simply 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 

Pros of a Health Insurance Stipend 

• Health stipends aren’t subject to compliance issues that group plans have
• They can be really easy to administrate through payroll. 
• Ease of use from time and administration perspective 

Health insurance stipends best practices

Health stipends, also known as wellness or healthcare stipends, are a valuable benefit that employers can provide to their employees. These stipends can be used for a variety of health-related expenses. Here are some best practices for implementing health stipends in your organization:

1. Clearly Define the Purpose: Clearly communicate the intended use of health stipends to employees. Whether it's for health insurance premiums, medical expenses, wellness programs, or a combination, ensure that the purpose is well-understood.

2. Flexibility and Choice: Allow employees some flexibility in how they use their stipends. Different employees may have varying health needs, so providing choice can make the benefit more valuable.

3. Compliance with Regulations: Ensure that your health stipend program complies with all relevant laws and regulations, such as the Affordable Care Act (ACA). This includes verifying that stipends are tax-compliant and meet legal requirements.

4. Transparent Communication: Clearly communicate the stipend amount, eligibility criteria, and how employees can access and use the stipend. Make this information easily accessible to all employees.

5. Regular Contributions: Consider making regular contributions to employees' health stipends, such as monthly or annually, to provide a predictable benefit and encourage participation in health-related programs.

6. Employee Education: Provide resources and education to help employees make informed decisions about how to use their stipends. Encourage them to explore healthcare options, compare plans, and understand their health-related expenses.

7. Encourage Preventive Care: Promote the use of stipends for preventive care, such as annual check-ups and vaccinations. This can lead to healthier employees and lower long-term healthcare costs.

8. Consider Health and Wellness Programs: Health stipends can be used to incentivize participation in wellness programs or gym memberships. Such programs can help improve employees' overall health and well-being.

9. Roll Over Unused Funds: Allow employees to roll over any unused stipend funds to the next year. This encourages responsible spending and planning for future health-related expenses.

10. Accessibility: Make it easy for employees to access their stipend funds. Consider using technology to streamline the process, such as direct deposits, mobile apps, or online reimbursement systems.

11. Measure and Evaluate: Regularly assess the effectiveness of your health stipend program. Gather feedback from employees and monitor the impact on their health and well-being.

12. Seek Legal and Tax Advice: Consult legal and tax professionals to ensure your health stipend program is structured in a way that maximizes the benefit to employees while staying compliant with tax laws.

13. Encourage Financial Wellness: Consider incorporating financial wellness elements into your health stipend program. This can help employees better manage their healthcare expenses.

14. Privacy and Confidentiality: Ensure that employees' health information and choices are kept private and confidential, as required by law.

15. Communicate Tax Implications: Make sure employees are aware of the tax implications of health stipends. Depending on how they are structured, stipends may be subject to income tax.

Health stipends can be a valuable addition to your employee benefits package, promoting both physical and financial well-being. By following these best practices, you can create a program that effectively supports your employees' health and contributes to a positive workplace culture.

How much is a health 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?

Is a health insurance stipend taxable? Great question. Let's take a look at the tax implications of health insurance stipends (sometimes called health stipends, medical stipends, or premium stipends) and the better option out there.

The truth is that the benefit of health insurance stipends is diminished by taxes. In fact, payroll and income taxes end up wasting 20-40% of the bonus before an employee ever gets to use it.

For companies that help employees by offering a health insurance stipend, tax-free reimbursement will typically have a huge tax advantage for both employer and employee. Let’s see how HRAs stack up against more traditional options of offering health benefits like health stipends or pay increases.

Opt for an HRA instead of healthcare stipend

For companies that help employees with health insurance by offering a “healthcare stipend” or by “adding to employee salaries”, HRAs will typically have 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, two relatively recently created 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.

Ready to learn more about HRAs? 

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. 

Ready to learn how much you can reduce benefits costs? 

Calculate your HRA tax savings and see just how much you can save or see how our HRA administrator software might work for you. Learn more about the reimbursement rules for QSEHRA. Or settle in for some comprehensive reading about the 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 2023.