How to give health insurance stipends to your employees

Health insurance stipends have emerged as a flexible way for employers to help cover employees’ healthcare costs without offering a traditional group health plan. Rising medical expenses and insurance premiums have put pressure on both employers and employees; nearly half of U.S. families struggle to afford healthcare costs​.

In response, many small businesses and startups are turning to stipends as a cost-effective benefit to attract and support talent when standard group plans are out of reach. This article provides a comprehensive overview of health insurance stipends – what they are, alternatives and complementary options, best practices for implementation, and related benefits like wellness stipends – all tailored for HR managers and CHROs seeking to craft competitive yet compliant benefit programs.

What Is a Health Insurance Stipend?

A health insurance stipend (or healthcare stipend) is a fixed sum of money that an employer gives to employees to offset their healthcare expenses​. Employees can use this taxable allowance to purchase an individual health insurance policy or pay for out-of-pocket medical costs (e.g. doctor’s visits or surprise medical bills)​.

Unlike a group health insurance plan, a stipend is not formal health coverage – it’s essentially extra pay intended for health needs. Employers usually add the stipend to employees’ paychecks, giving staff the flexibility and responsibility to choose and pay for the health plan or services that best fit their needs​. The stipend amount varies by employer and may be enough to cover the full premium of a basic individual plan or at least make a meaningful contribution toward a family policy​.

It’s important to note that stipends do not receive the tax advantages of insurance – funds are treated as taxable income by the IRS, which can reduce their value by roughly 30% once income and payroll taxes are applied​. In other words, neither the employer nor employee gets a tax break on stipend dollars, so $1 of stipend is worth only about $0.70 in actual spending power for health needs​. Despite this drawback, stipends remain popular for their simplicity and flexibility, especially among smaller employers.

Types of Healthcare Stipends

Companies can structure healthcare stipends in broad or targeted ways. Some offer a single health insurance stipend meant to cover any medical cost, while others break the stipend into specific categories to address particular needs​. Common types of healthcare stipends include:

• Medical stipends – for general medical expenses such as doctor visits, hospital stays, preventive screenings, and medical procedures​. This helps employees pay for services related to illness or injury, or even preventive care that might avert more serious health issues down the line.

• Dental stipends – to cover dental care costs like routine check-ups, cleanings, X-rays, fillings, or other dental treatments​. A dental stipend encourages employees to maintain oral health, which is an important component of overall health.

• Vision stipends – for vision-related expenses including eye exams, prescription glasses or contact lenses, and even corrective eye surgery such as LASIK​. These stipends recognize that clear vision is critical and vision insurance is often a separate benefit.

• Prescription drug stipends – to help employees afford their prescription medications​. This can be particularly valuable for those with ongoing prescriptions or high pharmacy costs.

• Mental health stipends – designated for counseling, therapy sessions, psychiatric consultations, or other mental health treatments​. With mental well-being a growing priority, a stipend in this area supports employees seeking therapy or other mental health services that might not be fully covered by insurance.

• Wellness stipends – for broader wellness and healthy lifestyle expenses that fall outside traditional medical care. Wellness stipends can cover things like gym memberships or fitness classes, nutrition and weight management programs, mindfulness or meditation apps, smoking cessation courses, ergonomic work equipment, massages or other alternative therapies, and even financial wellness services (such as personal finance coaching or budgeting apps)​. The goal is to promote overall well-being – physical, mental, and even financial health – to keep employees healthy and productive. (See Health vs. Wellness Stipends below for more on how wellness stipends differ.)

By tailoring stipends to specific needs (medical, dental, vision, etc.), employers can signal their commitment to supporting all aspects of employee health. However, whether consolidated or broken into categories, any health-related stipend is taxable and provides no guarantee that employees will spend it on the intended expenses – there is no legal way to require the funds be used for health insurance or care​. This is why many employers also explore other benefit options and safeguards alongside or instead of pure stipends.

Pros and Cons of Health Insurance Stipends

Like any benefit strategy, health insurance stipends come with advantages and disadvantages. It’s important for HR leaders to weigh these factors before deciding if stipends are the right fit.

Pros

Health insurance stipends can be an attractive option in several scenarios:

• Affordability for small employers: For small companies that cannot afford traditional group health insurance, a stipend offers a way to contribute to employees’ healthcare costs within a limited budget. (For context, the average cost of an ACA bronze-level plan for a 40-year-old individual is over $5,000/year​, which is prohibitive for some small employers. Stipends let them offer some help, even if it’s not full coverage.)

• Employee choice and flexibility: Stipends give employees freedom to choose the healthcare plan or services that best suit their needs​. This can be a perk for individuals who prefer picking their own doctors or insurance from the marketplace instead of a one-size-fits-all group plan.

• Simplified administration: Offering a stipend is administratively simple – essentially just a payroll addition – which can save HR time on researching plans or managing annual enrollments​. This simplicity can be appealing to lean HR teams or companies without benefits specialists.

• Competitive hiring tool (in certain cases): When a company can’t provide an extensive benefits package, even a modest health stipend can be marketed as a perk to attract talent. It shows candidates the employer is offering something to offset health costs. Additionally, stipends are highly customizable; employers can set any amount and even extend stipends to part-timers, contractors, or international employees – groups often not eligible for group insurance​. This flexibility can help cover diverse workforce needs without complex insurance rules.

Cons

On the other hand, there are important drawbacks and limitations to consider before using stipends in lieu of a health plan:

• No tax advantages: Unlike traditional health benefits (or alternatives like HRAs discussed later), stipends are subject to payroll and income taxes. Employers must pay roughly 7.65% in payroll tax on stipend amounts, and employees typically owe 20–40% in income tax on the funds. This tax friction means a significant portion of the money is lost to taxation, making stipends a less efficient use of benefit dollars​. Both employer and employee might prefer a solution that allows pre-tax contributions to stretch those dollars further.

• Potential compliance issues: For larger employers (50+ employees) subject to the Affordable Care Act employer mandate, simply giving a stipend does not satisfy the requirement to offer health coverage. Those employers could face penalties if they only provide taxable stipends and no actual insurance plan. Additionally, if an employer tries to structure a stipend program that reimburses medical expenses without the proper plan design, it could inadvertently trigger ERISA or other group health plan regulations​. For example, including traditional medical expenses inside a general “wellness” stipend (Lifestyle Spending Account) can cross regulatory lines and turn it into an unofficial health plan subject to legal requirements​. Employers must be careful to keep stipend programs compliant by not making them contingent on purchasing insurance or limiting them to medical expenses in a way that violates regulations.

• Uncertain usage and impact: With a stipend, employees might not use the money for health insurance at all. Employers cannot ask for proof of insurance enrollment or medical receipts when giving a no-strings stipend​. Especially during tight financial times, there is a risk employees will simply absorb the stipend into their paycheck for everyday expenses, leaving them still uninsured or underinsured​. This undermines the intended purpose of the benefit. In fact, some employees may not view a stipend as a health benefit at all – it may feel like just additional taxable income, which can dilute its perceived value in comparison to real insurance​.

• Lack of coverage assurance: A stipend by itself does not guarantee that an employee has adequate health coverage. It shifts the burden onto employees to find and manage their own insurance. Navigating the individual insurance market can be complex and time-consuming, and employees might procrastinate or make suboptimal choices​. If an employee fails to secure coverage, a serious medical issue could leave them facing large bills, defeating the purpose of the employer’s contribution. In contrast, with a group health plan or HRA, the employer can ensure funds go toward actual insurance or care.

In summary, health stipends are easy and flexible but come with trade-offs. They work best as a supplement or temporary solution when traditional insurance isn’t feasible. Many organizations mitigate these cons by pairing stipends with robust education (to encourage employees to buy insurance) or by eventually transitioning to more structured health benefit alternatives as the company grows.

Alternatives to Health Insurance Stipends

Given the challenges above, HR professionals often consider alternative or supplemental approaches that offer more control and tax advantages while still providing flexibility. Below are several popular alternatives to taxable stipends, each with distinct benefits:

Health Reimbursement Arrangements (HRAs)

A Health Reimbursement Arrangement (HRA) is an IRS-approved, employer-funded health benefit that reimburses employees tax-free for qualifying medical expenses and/or individual health insurance premiums​

In practice, an HRA allows the employer to set aside a fixed allowance amount per month (just like a stipend amount), but employees must submit proof of eligible healthcare purchases to get reimbursed. Unlike a stipend, HRA reimbursements are free of payroll tax for the employer and free of income tax for the employee, as long as the employee is enrolled in a health plan meeting minimum essential coverage requirements​. This means $1 in an HRA can deliver a full $1 of medical benefit, whereas $1 in a stipend might net only ~$0.70 after taxes – a key reason many employers prefer HRAs for their tax advantages​.

There are different types of HRAs designed for various situations. For instance, a Qualified Small Employer HRA (QSEHRA) is available to small businesses (<50 employees) and can reimburse health premiums and expenses up to certain annual limits, and an Individual Coverage HRA (ICHRA) can be offered by companies of any size with customizable classes and no set contribution caps. In both cases, employees buy their own insurance (on or off the ACA Marketplace) and then get paid back from the HRA for the premium and other medical costs. One advantage of HRAs is that unused funds generally stay with the employer – if an employee doesn’t incur expenses or leaves the company, any remaining dollars return to the company’s control​.

This prevents waste and gives employers cost predictability. However, HRAs do require more administration than a simple stipend (tracking receipts, HIPAA compliance, etc.), though many benefits platforms now handle these tasks digitally to ease the process​. Overall, HRAs offer a powerful combination of flexibility and cost containment, effectively bridging the gap between a stipend and a full group insurance plan.

Health Savings Accounts (HSAs)

An HSA is a personal health savings account that employees own, used in conjunction with a high-deductible health plan (HDHP). HSAs are usually funded by employee pre-tax contributions (via payroll deduction) and sometimes employer defined contributions. While not an employer-paid stipend per se, an HSA is a popular component of consumer-driven health plans and an alternative way to provide tax-advantaged healthcare funds.

Money put into an HSA is not taxed, can earn interest or investment returns tax-free, and can be withdrawn tax-free for eligible medical expenses. This “triple tax advantage” makes HSAs one of the most cost-effective ways to save for healthcare. For example, an employee with an HDHP can elect to divert part of their salary into an HSA before taxes – effectively deciding how much of their compensation to earmark for healthcare needs​.

The employee can then use their HSA debit card or checks to pay for doctor visits, medications, and other IRS-approved expenses. Unlike FSAs or certain stipend arrangements, HSA funds roll over year to year and remain the employee’s property even if they leave the company. In fact, the account is portable and stays with the individual for life. The main limitations are that HSAs are only available to those enrolled in qualifying HDHP insurance, and funds generally can’t be used to pay insurance premiums (except in specific cases like COBRA or Medicare premiums).

From the employer’s perspective, offering an HSA usually means offering a high-deductible insurance plan as well. Employers can contribute to employees’ HSAs (up to annual limits) as a benefit – these contributions are tax-free for both parties. In summary, HSAs are a tax-savvy alternative that empowers employees to save for medical costs, though they complement an insurance plan rather than replace it.

Flexible Spending Accounts (FSAs)

A Flexible Spending Account (FSA) is another pre-tax benefit account for healthcare, typically offered alongside traditional group health plans. FSAs allow employees to set aside a portion of their earnings before taxes to pay for medical expenses not covered by insurance. Employers may also contribute to FSAs, though unlike an HRA, an FSA is usually funded mostly by the employee. Both medical FSAs and dependent care FSAs exist (the latter for childcare expenses), but here we focus on healthcare FSAs. The key features of an FSA include: the annual contribution is capped by the IRS (e.g., $3,050 for healthcare FSA in 2024), the full yearly election is available upfront for use, and funds are “use-it-or-lose-it” – any unspent money at year’s end is forfeited to the employer unless the plan allows a small carryover or grace period. One major difference from HSAs is that the employer owns FSA funds; if an employee leaves the company, they generally lose access to unused FSA money​.

FSAs also require substantiation (receipts) for all claims, similar to HRAs. While FSAs provide tax savings and help employees budget for predictable expenses like orthodontics or surgeries, their lack of rollover and portability make them less flexible than HSAs. From the employer perspective, an FSA is a relatively low-cost addition to a benefits package that can encourage employees to manage out-of-pocket spending wisely. Many employers offer an FSA in combination with a traditional PPO health plan. In the context of stipends, an FSA could be seen as another way to give employees tax-free dollars for health expenses – but it must adhere to formal plan rules. In short, FSAs are a useful pre-tax alternative to stipends for planned medical expenses, albeit with more restrictions on access and timing of use.

Lifestyle Spending Accounts (LSAs)

A Lifestyle Spending Account (LSA) – sometimes called a wellness stipend or wellness spending account – is an employer-funded benefit that reimburses employees for a broad array of wellness-related expenses. LSAs are taxable (similar to stipends) because the expenses they cover often extend beyond the IRS definitions of medical care.

What makes an LSA different from a basic stipend is that it is usually structured and administered as a dedicated account with defined eligible categories (set by the employer). For example, an employer might allocate $50 per month in an LSA for each employee, which they can spend on approved wellness costs such as gym memberships, fitness classes, exercise equipment, meditation or mindfulness apps, nutrition or weight-loss programs, smoking cessation, stress management, massages, or other healthy lifestyle activities​. Some employers even include personal development or hobby-related expenses under wellness.

The flexibility is a major draw – companies can design their LSA to fit their culture and wellness goals. However, it’s crucial to remember that LSAs are not a substitute for medical coverage. They should be offered as a supplement to comprehensive health benefits, not in place of them. If an employer tried to use an LSA to reimburse medical bills or insurance premiums, it could run afoul of benefits laws (essentially turning the LSA into an illegal group health plan)​. Used properly, though, LSAs can significantly enhance a benefits package by addressing the holistic well-being of employees – helping with healthy living costs that insurance typically doesn’t touch. And even though they’re taxable, the morale and health boost from wellness activities can pay dividends in productivity and retention.

Health vs. Wellness Stipends

It’s easy to confuse health stipends with wellness stipends since both involve the employer giving funds for well-being. The key distinction lies in how the money is meant to be used.

A health insurance stipend (healthcare stipend) is intended for healthcare expenses – things like insurance premiums, doctor or hospital bills, prescriptions, or other necessary healthcare costs​. In contrast, a wellness stipend is meant for general wellness or healthy lifestyle expenses that are not strictly medical treatment​. In other words, if an expense would typically be covered by a health insurance plan or falls under medical care (as defined by IRS rules), it’s the domain of a health stipend; if it’s more about preventive health or personal wellness (exercise, stress reduction, etc.), it likely falls under a wellness stipend.

Typical uses: Health stipends help employees pay for critical health needs or insurance. For example, an employee might use a health stipend to afford their monthly health insurance premium or pay the co-pay for a doctor’s visit or a prescription refill. On the other hand, wellness stipends cover “lifestyle” health improvements: gym memberships, yoga classes, counseling or coaching sessions, weight loss program fees, ergonomic office equipment, meditation app subscriptions, nutrition or cooking classes, and so on​. Wellness funds could even be applied to unconventional items like fitness trackers, spa treatments, or healthy meal delivery kits – essentially, any expense that promotes physical or mental well-being, even if a medical plan wouldn’t reimburse it.

Some employers also include financial wellness programs in their wellness stipends, recognizing that financial stress affects overall health. This might mean allowing the stipend to reimburse financial planning workshops, budgeting software, or student loan counseling, as part of a holistic wellness approach​.

Holistic benefits: While a health stipend addresses immediate medical financial needs, a wellness stipend takes a more preventive, whole-person approach. Wellness stipends acknowledge that keeping employees healthy isn’t just about doctor visits, but also about exercise, mental health, nutrition, and work-life balance. These perks can boost employee morale and productivity – for instance, in 2021, 79% of employees in one survey said their employer’s well-being programs helped them be as productive as possible and avoid getting sick​. By reducing stress and encouraging healthy habits, wellness stipends can indirectly lower healthcare costs (fewer sick days, lower risk of chronic disease) over time.

From an HR perspective, offering a wellness stipend alongside a health stipend or insurance plan creates a more comprehensive benefits package that appeals to a wide range of needs. An employee training for a marathon might value the fitness reimbursement, while another who doesn’t frequent the gym could use the fund for a meditation retreat or a standing desk – each employee can invest in their personal well-being in a way that resonates with them.

It’s worth noting that wellness stipends are always taxable (they don’t qualify for tax-free status because they cover non-medical costs), and like health stipends, they rely on employee initiative to be effective (employees need to actually use them for healthy activities). Successful wellness stipend programs often require good communication and encouragement so that employees take full advantage of the benefit.

Best practices for implementing health insurance instipends

If you decide to offer health insurance stipends (with or without additional wellness stipends), consider the following best practices to ensure the program is effective, fair, and compliant:

• Ensure transparent communication: Clearly explain to employees what the stipend is for and how it works. Because stipends are not traditional insurance, it’s crucial to educate employees on using the stipend responsibly – for instance, encourage them to purchase health insurance with those funds. Be transparent that the stipend will come as taxable income in their paycheck. Providing documentation or an info session on how to shop for individual health plans can empower employees to make the most of the benefit. Ongoing communication is key: regularly remind employees that the stipend is meant to support their health needs​, so they view it as a valuable health benefit rather than just extra pay. Invite questions and provide resources so that everyone understands the stipend’s purpose and limitations.

• Maximize accessibility and inclusion: Stipends offer a unique flexibility to reach populations that might be left out of normal benefits. Use this to your advantage by making the stipend widely accessible to all employee classes as appropriate. For example, you might include part-time employees, contractors, or international staff in a stipend program if they’re normally not eligible for your group insurance – the stipend can give them some health support without affecting employment status or contractor classification​. Ensure the process for receiving and using the stipend is easy and equitable: simple payroll additions or an uncomplicated reimbursement submission (if you require receipts for tracking) will make the benefit more usable. Accessibility also means considering varying needs – some employees might need the money for premiums, others for copays, others for different health services – so avoid over-restricting how it can be used (aside from the legal necessity of not tying it to specific proof of insurance).

• Stay competitive but realistic: While a stipend might not equal a full insurance plan, it should be sized appropriately to be meaningful. Research market benchmarks and consider what other companies of your size or industry are offering – you want your total benefits package (salary + stipend + other perks) to be attractive enough to recruit and retain talent​. If you can only afford a small amount, be honest about it being a supplemental perk. If you can be generous, a larger stipend (or multiple stipends for different needs) can set you apart. Also, think about frequency: stipends can be given monthly, quarterly, or as a lump sum annually. Monthly distributions tend to integrate into pay more seamlessly, but an annual lump sum could help employees cover a big expense like an insurance premium upfront. Align the stipend structure with your company’s cash flow and the way employees are likely to use it. Finally, consider complementing the stipend with other benefits (like an HRA or wellness program) as you grow, so that your approach scales and remains competitive over time.

• Maintain legal compliance: Compliance is critical when offering stipends. To avoid penalties, never make the stipend contingent on an employee providing proof of insurance or medical expenses – requesting such proof could inadvertently create a group health plan subject to ACA and ERISA rules​. Treat the stipend purely as taxable wages given for the purpose of health support. Make sure to properly withhold taxes on stipend amounts and include them in employees’ taxable income (many companies label it as “health stipend” on pay stubs so employees know what it is). If you’re an Applicable Large Employer under the ACA, remember that offering only a stipend does not shield you from potential employer mandate penalties, since a stipend is not formal health coverage. In that case, consult with a benefits advisor or legal counsel about either integrating an HRA/QSEHRA or providing at least a minimal group plan to satisfy requirements. It’s wise to have a written policy document for your stipend program that outlines eligibility, tax treatment, and the intended use of the funds. This sets clear expectations and can be shared with employees and auditors if needed. When in doubt, seek guidance to ensure your stipend program complements your benefits strategy without violating regulations.

By following these best practices – communicating clearly, being inclusive, keeping the stipend competitive, and adhering to tax and health plan rules – you can implement a health insurance stipend program that genuinely supports your employees and strengthens your benefits offering. Stipends work best when designed thoughtfully and used as one piece of a broader commitment to employee health and wellness.

Choosing the right option for your business

Health insurance stipends provide a flexible alternative for employers to contribute to healthcare costs, especially when traditional insurance is out of reach. When implemented with care, they can empower employees to take charge of their health decisions and help smaller companies stay competitive in talent markets. However, stipends are not a one-size-fits-all solution. Many organizations find that a combination of approaches – stipends for flexibility, HRAs or HSAs for tax efficiency, and wellness programs for holistic well-being – offers the best balance.

By understanding the pros and cons, exploring alternatives like HRAs/HSAs/FSAs/LSAs, and following best practices, HR leaders can craft a benefits strategy that maintains compliance, fosters employee wellness, and aligns with company budgets. An employee benefits broker can help with this if needed.

HRAs like an ICHRA are super powerful but have administrative complexity and compliance obligations. If you're looking for a simple way to give your employees money to pay for healthcare, we'd love to chat. We make it easy to set up and administer an ICHRA, and we handle compliance, so you don't have to.