Health insurance stipends pros and cons

Giving employees a taxable stipend to go toward medical costs is a common choice made by small firms who cannot afford to provide formal health coverage. The value of these dollars is reduced since a health insurance stipend payment is regarded as an integral component of employees’ salary and not as a distinct benefit, despite the fact that this option is simple to administer and saves employers time.

This means that unlike tax-free health benefits, stipends have payroll and income tax ramifications. Additionally, companies are not allowed to demand that workers provide proof that they used their stipend money to pay for health insurance.

So, in the end, is receiving a health insurance stipend worthwhile? The advantages and disadvantages of taxable health insurance stipends will be discussed in this article along with best practices and a tax-free method of providing health insurance to your staff.

Employees who receive a health insurance stipend are given a set, taxable amount to utilize for out-of-pocket expenses or to purchase an individual health insurance plan.

This gives you the opportunity to let them choose a health insurance plan of their own rather than having to pay for group health insurance for all of your employees, which may be more affordable for you given the escalating cost of healthcare.

The monthly contributions made by the employer are often included in the employee’s paycheck as earnings. You have the option of giving your employees a monthly stipend through an expense card or a lifestyle savings account (LSA), or you can pay for their medical bills.

A stipend may have some special benefits. Employees will get access to a variety of coverage choices, be able to compare them, and be able to choose the health insurance strategy that best meets their requirements, among other advantages.

With a health stipend, you can easily give overseas employees and 1099 contractors a benefit without impacting their employment status.

You can completely tailor your stipend levels to your organization’s needs without any contribution limits as a stipend isn’t a recognized health benefit.

If your company qualifies, a health insurance stipend can be an excellent option.Offering a formal corporate health insurance plan is not something you can afford.

You shouldn’t have to be concerned about any ERISA, HIPAA, or IRS compliance requirements.Through automatic payroll increases, you want something straightforward and simple to operate.

For the cost of their individual health insurance premiums, your employees can earn advance premium tax credits (APTC).

Employees who get stipends are not required to utilize the funds to pay for health insurance. You can only assume that your employees will use the stipends for health insurance and other medical costs. Employees may also perceive the removal of the stipend as a pay decrease if they consider it to be a component of their earnings. By doing this, morale can decline.

Payroll tax is due by employers on reimbursements reaching 7.65%.

Employees pay taxes on their income, which typically ranges from 20% to 40%.

It may not achieve your intended goal of providing a health benefit because you cannot ask employees to produce proof of insurance.

The very people you were trying to hire might be turned off because many potential employees might not consider a stipend to be a true “benefits package.”

Guidelines for health insurance reimbursements When you adhere to local tax requirements, stipends are acceptable. Stipends are now generally used as a supplemental benefit to regular salary, but they have occasionally been misused in the past. Stipends shouldn’t ever be used as a general rule to exempt a worker from a salaried position, whether they work full- or part-time.

Never demand proof of health insurance from employees.

For health insurance, direct payment or direct reimbursement is seen as an employer payment arrangement, and the firm may be penalized for requesting proof.

Consider the allowance as taxable income.

Remind workers on a regular basis that the stipend is meant to be a health benefit. By doing this, workers will be more inclined to use it for medical needs rather than just seeing it as extra money.

The insurance and services that employees select are paid for out of their own pockets. Employees then provide evidence of a paid eligible expense, typically in the form of a receipt, and the employer reimburses them after verifying the expense.

They are tax-exempt. Payroll taxes are not applied to reimbursements for either the employer or the employee. If the employee has minimal necessary coverage, they are also exempt from income taxes (MEC).

They mandate that the money be used for medical costs by the employees. According to IRS Publication 502, employees may only utilize the funds for approved costs. Plans that further limit the costs that can be reimbursed can be created by employers.

They are simple to use. Companies like PeopleKeep offer administration software that is entirely compliant and simple to use to make submitting and paying for expenses easier. To guarantee that you only compensate employees for legitimate expenses, a team of professionals evaluates all expense documentation.

Schedule a conversation with a specialized benefits advisor if you think an HRA or health stipend is the best option for your company, and we’ll help you get started. The first version of this blog post was released on August 25, 2020. The most recent update was on September.