How to give your employees money to pay for healthcare

Benefits are hard, can I just give my employees money?

Tl;dr: Yes, you can give your employees money to pay for healthcare in a few different ways. We'll discuss two — healthcare stipends and health reimbursement arrangements. We'll outline the pros and cons of each option, as well as the legal and tax implications.

Healthcare Stipend

The most basic option is to just give employees extra money outright to pay for healthcare; this is called a healthcare stipend.

A healthcare stipend is essentially a pre-determined amount of money given to employees each month to cover healthcare expenses. This can include health insurance premiums, medical bills, dental care, vision care, or even wellness programs. The stipend is added to an employee's regular paycheck and is treated as taxable income, meaning you, as the employer, are liable for payroll taxes, and the employee is liable for income taxes on this amount.

For example, you might decide you want predictability and don't want to deal with setting up and administering benefits, but like the idea of providing your employees with some amount of money they can use to find their own health insurance plan. You can give them a healthcare stipend and they can use it to pay for health insurance, medical bills, and more. But there are legal, compliance, and tax implications you need to be aware of.

Pros of offering a healthcare stipend

Flexibility: Employees have the freedom to choose their healthcare plan or services that best suit their needs.

Simplicity: Employers can avoid the complexities involved in offering healthcare benefits directly.

Cost-effective: Both the employer and employee know exactly what will be spent each month on healthcare, making budgeting easier.

Cons of healthcare stipends

Tax Implications: Unless set up as part of a tax-advantaged account like an ICHRA, healthcare stipends are considered taxable income. So any money you provide for your employees adds to their taxable income, and they have to pay income taxes on it.

Limited Oversight: Employers have less control over how the stipend is spent. You might want to ensure that employees are using the stipend for healthcare-related expenses, but you can't require them to provide proof of how they spent the money.

Possible Inadequacy: The stipend might not be enough to cover an employee's total healthcare costs, potentially leading to under-insured employees.

How to Set Up a Healthcare Stipend

Budget Assessment: Determine how much you can afford to provide as a healthcare stipend.

Legal Consultation: Speak with a tax advisor or legal counsel to ensure that the stipend program complies with federal and state laws.

Employee Survey: Optionally, survey your employees to find out what their healthcare needs and priorities are.

Define an allowance: Decide on the stipend amount. It can be a flat rate for all employees or vary based on position, tenure, or other factors.

Communicate: Clearly communicate the stipend program to your employees, explaining what it covers and how to access it.

Tax Considerations

As mentioned before, healthcare stipends are considered taxable income. This means that both the employer and employee are liable for paying taxes on the stipend. The employer must pay payroll taxes on the stipend, and the employee must pay income taxes on the stipend.

If you want the stipends to be tax-free, consider setting up a Health Reimbursement Arrangement (HRA) or another tax-advantaged account. This requires more administrative work but offers tax benefits for both the employer and employee.

Legal implications of a healthcare stipend

Healthcare stipends are not subject to the same regulations as traditional group health insurance plans. However, there are still some legal considerations to keep in mind. For example, you cannot discriminate when offering a healthcare stipend. You must offer the same stipend to all employees, regardless of their health status, age, or other factors.

You also cannot require employees to provide proof of how they spent the stipend.

Health Reimbursement Arrangements (HRA)

HRAs like ICHRA are tax-advantaged accounts that can be used to reimburse employees for healthcare expenses. They're funded by the employer and can be used to reimburse employees for health insurance premiums, medical bills, dental care, vision care, or even wellness programs. The employer can set up an HRA for each employee or for a group of employees.

Pros of offering an HRA

Tax Advantages: HRAs are tax-advantaged accounts, meaning that the money contributed to them is not subject to payroll taxes. Likewise, employees aren't required to pay income taxes on the money they receive from the HRA. This makes HRAs a much more cost-effective option — for both employers and their teams — than healthcare stipends.

More efficient and controlled budgeting: ICHRAs and HRAs in general are much more efficient than selecting individual benefits, because everyone uses the money in the way that's best for them. With an ICHRA, you're also able to create custom classes for your employees; so you can offer different amounts to different employees at different ages or geographic locations, for example. This is important because costs vary widely across the country, and you want to make sure that your employees are getting the best value for their money.

Flexibility: Just like with a healthcare stipend, your employees will choose their own healthcare plan or services. HRAs are cool because they can be used to cover a wide range of healthcare expenses, from insurance premiums, prescription drugs, therapy, medical bills, dental services, vision care, or anything else on the IRS 502.

Simplicity: HRAs are much simpler to set up and administer than traditional group health insurance plans. You don't have to worry about choosing a plan, negotiating rates, dealing with issues that arise, or handling claims. You just set up the HRA and let your employees use it to pay for their healthcare expenses.

Cons of offering an HRA

More work for employees: Because employees have a budget they can allocate however they like, there's typically more work involved in finding and selecting a plan. It's important employees have the right tools to help them make the best decision for their needs.

Requires setup: HRAs require more effort than healthcare stipends, since there are compliance obligations and operations required to create and administer the HRA. If you decide to set up the HRA, choose a third-party administrator, and ensure that the HRA complies with federal and state laws.

Tax Considerations

For employers, the contributions made to an HRA are tax-deductible as a business expense. This allows companies to better predict and manage healthcare expenses while reaping tax benefits, thereby providing a financial incentive to offer such arrangements.

For employees, reimbursements received through an HRA are generally tax-free when used for qualified medical expenses, as defined by the IRS (Internal Revenue Service). This means that employees can pay for a variety of medical costs, ranging from premiums to copayments, without having those funds subject to federal, and often state and local, income taxes. However, it's crucial to note that there are strict guidelines and regulations governing the use of HRA funds, and any money reimbursed for non-qualified expenses could be subject to taxation.

All costs must be substantiated with receipts or other documentation, so using a third-party administrator to manage the HRA is recommended.

Choosing the right option for your business

Providing a healthcare stipend offers flexibility for your employees and simplicity for your business. However, it's not as straightforward as it seems — it's crucial to understand the associated pros, cons, and legal considerations.

HRAs like the ICHRA are super powerful but come with administrative compexity 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 all the compliance and legal stuff so you don't have to.