A common question among many small business owners is whether they can offer a stipend to their employees to help them pay for the cost of individual health insurance. They also wonder of the stipend can work as a real alternative for other options like Health Reimbursement Arrangement (HRA).
The answer to this question is Yes. Small business owners can provide their employees with health insurance stipend. Nevertheless, the business owners should be aware of the tax implications on the health insurance stipend against the tax free reimbursement plan like the small business HRA.
Providing a health insurance stipend
Offering a health insurance stipend is one way for small business owners to help their employees cover their health costs. It is simply an extra money, which is added to the employee’s paycheck. This stipend is a flat amount given to all the employees, which they can use for any purpose. The employers may ask the employee to spend the stipend on health insurance, but he cannot demand the employee to do so. The company cannot demand employees to surrender proof that they purchased health insurance plans with the help of the stipend given.
One main drawback of the health insurance stipend is that it is treated as a taxable income for the employees. Small business, which offers a health insurance stipend is also required to pay payroll taxes on the reimbursements.
Tax-free reimbursement arrangement
Health insurance stipends may be easy to set up, but as it is taxable it serves as an understandable downside for many businesses and their employees. More than that, it is not sure that the stipend is always used by the employee for health benefits. This defeats the purpose of offering the health insurance stipend in place of a group plan.
This is the reason many employers opt for tax free reimbursement plans. For small businesses with less than 50 employees, IRS allows flexibility to offer a health insurance stipend without the tax consequences. The HRA lets employees get the reimbursement only for qualified health insurance and medical expenses.
Setting Up a Small Business HRA
Setting up HRA for a small business is very simple
The business should establish a formal written small business HRA plan document.
The employer determines the monthly amount available to each employee for reimbursement of qualified health insurance expenses. The employer can offer a different HRA allowance amount to different employee based on their family status.
Employees should submit their health insurance expenses and once it is approved, the employer reimburses the amount to the employee.
Why health insurance stipends and reimbursement plans are popular among the people in the US
Offering employees with a taxable stipend or a tax free reimbursement plan instead of a specific health insurance plan is gaining popularity in the US because of the following reasons.
In the past, small businesses were depending upon group health insurance broker. But the continual increase in health care costs unfavorably impacted the small businesses’ ability to provide health benefits to the employees. The employers started dropping the group health insurance plans as they have become too expensive.
Another important reason is that the employees are given freedom to choose the health plan that best fits their family, instead of a traditional one-size fits all health plans chosen by the employer. Employees can shop for their health insurance plan through an employee benefits agency or any insurance company.
This plan also benefits their employee by giving them an option to fix their monthly allowance than requiring them to contribute a specific amount towards a group health insurance plan.
Once this plan is implemented by the employer, it just takes 5 to 10 minutes every month to administer the plan online. Whereas a group insurance plan takes much time and commitment.
The bottom line is, a health insurance stipend is considered as the best option fronting the expensive group health insurance plans. One main thing to consider here is the tax implication associated with the stipend. Thus a small business owner can either choose a stipend with tax implications or a tax-free Small Business HRA.
We American Marketing Administrators, are a group of Certified Insurance Agents and we help you to choose the best benefits to your employees. We have vast experience working with businesses to find the best small business employee insurance for their team. We also offer Individual and Family insurance in California.