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stipend in lieu of insurance

Stipend in lieu of health insurance? Here's the truth.

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.

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. 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.

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.

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.

What is a medical stipend? 

Thankfully, we're taking about the same thing as above. A medical stipend is a predetermined amount of money that employees can use to buy health insurance or pay for medical expenses. 

Should I offer a stipend in lieu of health insurance?

Some employers offer a regular, fixed amount of money, or health insurance stipend, to their employees to help cover the cost of health insurance. While this option is easy from a time and administration perspective, the value of these dollars will be greatly diminished because they are considered taxable income (~30%).

Furthermore, simply writing off the stipend as a business expense will have payroll as well as income tax implications.

Health stipends aren’t subject to compliance issues that group plans have, and they can be really easy to administrate through payroll. But they aren’t tax advantaged like an HRA.

Not only are small businesses required to pay payroll tax on the reimbursements, 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.

Ready to learn how much you can reduce benefits cost?

Is a health insurance stipend 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.

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

How does health insurance reimbursement work?

The employer chooses an HRA for her company, sets a budget that works for them, and then lets the employers know they can use it. From there, once an employee pays for a medical expense or premium, they just turn in the receipt and submit for reimbursement.

For companies that help employees with health insurance by offering a health stipend or by adding to employee salaries, tax-free reimbursement will typically have a huge tax advantage for both employer and employee. For example, if a 10-person company offers employees $300/mo ($3,000/mo in total reimbursement) by increasing salaries versus tax-free through an HRA, $1,200 a month ends up going to taxes each month.

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.

  • 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. 

Wondering how our platform might work for you? Ask us.

Ready to learn more about HRAs?

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. 

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