When Employers Cannot Afford Formal Health Insurance Benefits
Businesses with fifty or more full-time employees must offer health insurance coverage to employees who work 30+ hours per week. While companies with fewer than fifty workers are not held the same standard, the reality in today's economic environment is that many small and mid-sized businesses cannot afford the high costs associated with providing health insurance benefits. But employers who want to help their employees pay for healthcare can offer several alternatives. These other options include a taxable Health Insurance Stipend, or a non-taxable Health Reimbursement Arrangement (HRA).
Health Insurance Stipends Versus Health Reimbursement Arrangements
· Health Insurance Stipends
A health insurance stipend is a predetermined amount of money employers can pay to their employees to help them purchase their health insurance or pay for medical costs. Unlike a formal tax-free healthcare insurance benefit, a health insurance stipend is not a separate benefit, but a part of an employee's income. And just like regular income, healthcare stipends will incur tax implications for the employee and the employer.
While a healthcare stipend is intended to help employees secure their healthcare benefits and pay for health-related expenses, employees are not obligated to prove that the funds were allocated in this manner. Workers can use the stipend for any purpose and do not have to prove that they have used the funds to purchase insurance or pay for medical costs. If an employee chooses not to use the stipend for healthcare expenses, it simply becomes additional income.
· Health Reimbursement Arrangements
A Health Reimbursement Arrangement (HRA) is an IRS-approved and employer-funded health benefit that reimburses workers, tax-free, for qualifying out-of-pocket medical expenses and individual health insurance premiums. Some employers choose HRA's because the reimbursements are tax-free for employees and tax-deductible for employers.
Many employers prefer HRAs over healthcare stipends due to the tax advantages and budget control. The employer determines the amount and conditions of the plan and how much tax-free allowance they want to offer to their employees each month. Once a monthly allocation is set, the employer's payment cannot exceed that amount. When using an HRA, employees will choose an insurance policy that provides the services they need and purchase it with their own money. When an employee incurs an expense for insurance premiums, co-pays, or medical care, they will submit their receipt to their employer for reimbursement. Any unused funds can be carried forward, and HRA plans cover the employee, their spouse, and their dependent children up to age 27.
When Employers Provide a Health Insurance Stipend
When employers offer a health insurance stipend, they intend to provide their employees with additional funds to purchase an individual healthcare plan or pay for out-of-pocket healthcare expenses. Healthcare stipends are typically paid as wages by the employer monthly. The employer's contribution to the worker's healthcare is included in the employee's paycheck, but employers can also offer the stipend as a:
· Monthly allowance through an expense card, or
· A lifestyle savings account (LSA), or
· A reimbursement of your employee's healthcare expenses.
Due to consistently rising healthcare costs, a stipend can be a cost-effective way for small and mid-sized businesses to help their employees obtain the health coverage and medical care they need without having to bear the costs of providing a group health insurance policy.
The Advantages of Offering Health Insurance Stipends
There are advantages to offering a health insurance stipend. A stipend could be a wise option for your business if:
The company wants to provide its employees with a healthcare option that can be managed through automatic payroll additions.
The company does not want to manage traditional group health insurance plans, or the compliance and regulatory considerations associated with the IRS, HIPAA, or ERISA.
· The company wants to benefit 1099 contractors and international workers without affecting their employment status.
· The company wants to customize stipend amounts to the organization's needs without any contribution limits.
· The company wants to provide an allowance for some health benefits that HRAs and traditional group health insurance do not always cover, such as mental health benefits.
Some best practices for employers to consider include the following:
Employers cannot require employees to prove that they purchased a health insurance policy.
The employer could face penalties if they ask the employee for verification.
Stipends are typically paid monthly as a part of regular payroll.
The employer and the employee must treat the stipend as taxable income.
Companies should communicate that the stipend is intended to help employees pay for health insurance premiums or healthcare costs.
Stipends and Premium Tax Credits
While additional tax considerations are associated with health insurance stipends, as opposed to tax-free HRAs, stipends can benefit organizations with employees who qualify for premium tax credits. Premium tax credits, or health insurance premium subsidies, allow individuals to receive a discount on their individual health insurance plans. When the worker is offered an HRA, they may have to either reduce the amount of their tax credit by their allowance amount or opt out of it altogether to participate in the HRA. Employees can participate in their employer's benefits offering with a stipend and collect their full premium tax credit.
The premium tax credit (PTC) is a refundable credit that helps eligible individuals cover the premiums for health insurance purchased through the Health Insurance Marketplace. Those who apply must meet specific requirements to receive this credit and file a tax return with Form 8962, Premium Tax Credit (PTC).
When Employers Provide an HRA
An alternative to the healthcare stipend option is a Health Reimbursement Arrangements (HRA.) An HRA is an IRS-approved, employer-funded health benefit designed to reimburse employees, tax-free, for qualified out-of-pocket healthcare costs and individual health insurance premiums. Some small and mid-sized employers prefer HRAs over healthcare stipends due to tax advantages and budget control. Employers can determine how much monthly tax-free allowance they want to offer their employees. Once a monthly allocation is selected, the employer's payment cannot exceed that amount.
When is an HRA the Best Option?
There are advantages to small businesses considering the option of an HRA. An HRA could be an option for your business if:
The company cannot afford to provide a formal group health insurance plan.
An HRA offers cost control by setting a predetermined allowance.
Employer contributions are tax-deductible.
The plan can suit the company's and the employee's needs.
An HRA provides a lower risk because there is no payout until the reimbursement.
It helps employers attract and retain talent by offering an employee benefits package.
The Advantages of Offering an HRA:
HRA's are tax-free. Payroll taxes do not apply to reimbursements for the employer or the employee. Income taxes do not apply as long as the employee has minimum essential coverage.
HRA's require employees to use the funds for medical expenses. Employees can only use the HRA for eligible costs under IRS Publication 502
HRA's are easy to implement. Companies can use specific software programs to facilitate expense submission and reimbursement.
HRAs help small and medium-sized organizations to offer affordable, quality healthcare benefits.
Choosing the Best HRA for Your Organization
HRAs allow companies to reimburse employees for individual health insurance policies and out-of-pocket healthcare costs tax-free. Workers can choose their insurance plan, and the employer reimburses the employee for insurance premiums and qualified medical expenses up to their monthly allowance. This gives employees more freedom to choose affordable coverage and saves the employer money. There are several distinct types of HRAs designed to meet the needs of any organization:
The qualified small employer HRA (QSEHRA) is designed for employers with fewer than 50 employees.
The individual coverage HRA (ICHRA) is designed for businesses of all sizes and allows additional customization. For example, if an organization wants to provide a group plan to a specific class of employees and an HRA allowance to the rest of the staff, an ICHRA allows for customization.
The group coverage HRA (GCHRA) is also an integrated HRA. This group coverage is designed to be paired with a traditional group health plan. This is a good option for employers with a high deductible health plan (HDHP) that will help cover the out-of-pocket costs not fully covered by the group plan.
HRA's and Premium Tax Credits
Since HRA allowances pay for health insurance premiums with tax-free funds, workers must account for this allowance and any premium tax credits or advanced payment. This works differently for each type of HRA. With a qualified small employer HRA (QSEHRA), workers can maintain the health coverage tax credit and still participate in the QSEHRA. However, workers must reduce their subsidy by the amount of their QSEHRA allowance and do not have the option to opt-out.
If the employer offers an individual coverage HRA (ICHRA), employees must choose between the ICHRA or the premium tax credits. Employees can waive the subsidy altogether if their ICHRA is considered affordable. But, if it's not regarded as affordable, employees can opt out of the ICHRA and continue collecting the premium tax credits
For More Information About Your Options, Call the Lynch Law Firm Now
Health insurance stipends and HRA's are alternative ways for small and mid-sized companies to help their employees bear the high cost of acquiring health insurance and paying for healthcare expenses. Stipends are cost-effective and easy to administer but are subject to taxes. Although HRA's are tax-free, they can only be used for insurance premiums and other medical costs.
Whether your organization chooses a taxable health insurance stipend payment or a tax-free reimbursement arrangement, there are several personalized benefits options for small or medium-sized business owners who want to offer health benefits that are affordable, flexible, and easy to administer.
The Lynch Law Firm Will Navigate Your Legal Matter from Inception to Resolution
If you are an employer with a labor and employment law issue, the Lynch Law Firm has the resources to help you find a resolution. In addition to defending employers against employees' claims, the attorneys at the Lynch Law Firm team can also assist you in developing the following:
● Labor and Employment Issues
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● Legal Agreements for non-disclosure, non-compete, and severance.
● Workplace Investigations
● Harassment Prevention Training Modules
● Employee Manuals
● Performance Evaluation Materials
About Labor and Employment Attorney Natalie Lynch
Attorney Natalie R. Lynch is the managing member of the Lynch Law Firm, and she focuses her legal practice on labor and employment law. In addition to helping clients with employment issues, Natalie is the only consulting and credentialed investigator in Central Texas who conducts third-party investigations into allegations that include harassment, discrimination, and a hostile work environment. Natalie is also a credentialed investigator and dispute resolution mediator with the experience required to help employers minimize employment risk factors.
Schedule a Consultation with the Lynch Law Firm Now
If you are an employer and you have questions about healthcare stipends or HRA's or seeking to resolve a labor and employment issue, call us now. Protect yourself, your employees, and your business by contacting the Lynch Law Firm directly. You can email us or call 512 298 2346.