Pros & Cons of Health Insurance Stipends

As a small business owner, you want to take care of your employees; after all, they are the backbone of your business. Offering group health insurance is a great way to take care of them, but it can be quite expensive, especially for small businesses.  If you do opt out of giving your employees group health insurance benefits, then you might want to consider a health insurance stipend instead. But is offering a stipend the best way to take care of your employees? There are some pros and cons to health insurance stipends that you should be aware of before making your decision. 

What Is A Health Insurance Stipend?illustration of a hand with money bill over it

With a health insurance stipend, you, the employer,  offer a fixed amount of money to your employees every month to help them purchase individual health insurance, or to help them pay for their medical expenses. The amount is normally added to your employees’ paychecks, and functions as a taxable income. 

The Pros Of Health Insurance Stipends

There are some advantages to offering your employees a health insurance stipend. They will receive a fixed, taxable stipend to purchase individual health insurance. This allows you the ability to give them the option of getting health insurance, without having to foot the bill for group health insurance for all of your employees. Other pros to stipends include:

  • They are not a group health plan, so you do not have any compliance considerations.
  • They are simple and easy to manage because you automatically add them to your payroll. 

The Cons Of Health Insurance Stipends

magnifying glass over a document
One of the cons of health insurance stipends are that you cannot request proof of insurance.

With a stipend, there’s no requirement that employees actually use the money to purchase insurance. So, while you trust that your employees will use these stipends for health insurance or medical expenses, there is always a chance they won’t. If this is a problem for you, then you need to consider this disadvantage as well as others, including: 

  • You cannot require employees to submit proof of insurance, so they can use the money for purposes other than what you intended it for.
  • Employees must claim the amount received as income and will have to pay taxes on it.
  • Businesses will be required to pay applicable payroll taxes. Payroll tax on reimbursements total 7.65% (6.2% for Social Security and 1.45% for Medicare).

If You Choose To Offer A Stipend…

Remember that you cannot ask your employees for any proof of health insurance. Instead, you should consistently communicate and remind employees that it is a stipend intended as a health benefit, not an increase in pay. Some employees might see the stipend as part of their wages, so if something were to happen and you had to take away the stipends, they might see it as a pay cut.

Alternatives2 signs in different directions with a red one saying one way and the green one saying another way.

If you are worried that your employees will not actually use the health insurance stipend you provide to pay for health insurance, you might want to look into other options for offering health benefits to them. There are affordable group health insurance plans out there, or you can consider a Health Reimbursement Arrangement  (HRA). HRAs are also a way to reimburse employees for healthcare expenses, but they are tax-free and require employees to use the money for medical expenses. Before choosing to offer your employees a health insurance stipend, you should speak to an EZ agent, who can help you determine what is best for your business.

An EZ agent will review the needs of your business and of your employee,  and will present you with all available options. This means you’ll be able to find the most affordable option for providing benefits to your employees. All our agent needs is your zip code and they can pull up all available plans in your area and compare them for you. The best part? We offer our services for free, so you can find your best option, without spending any money to do so. To get started, enter your zip code in the bar above, or to speak to an agent, call 888-998-2027.

About The Author: Cassandra Love

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