It's common for a business owner to ask "Can I offer employees a health insurance stipend, allowing them to find their own insurance plan?"
The answer is yes. Using a pure defined contribution health plan approach, businesses can provide a health insurance stipend to employees to use on health insurance. It works just like a healthcare allowance for health insurance.
In fact, more and more business owners and nonprofits are using health insurance stipends instead of offering a one-size fits all group health insurance plan.
This article reviews how an employer can set up health insurance stipend program for employees.
Provide a Health Insurance Stipend Using a Section 105 Plan
The most common approach to providing a health insurance stipend is to set up a limited-purpose Section 105 medical reimbursement plan. By using a Section 105 medical reimbursement plan, the employer stays compliant with ACA, IRS, ERISA, and HIPAA regulations, and they can offer health insurance stipends on a tax-free basis. In fact, a Section 105 plan is one of the only compliant ways a business can provide health benefits in this way.
Setting up a Section 105 plans is quite simple:
- The business establishes formal written Section 105 plan documents.
- The business determines the amounts available to each employee monthly for reimbursement of qualified health insurance expenses.
- Employees submit health insurance expenses, and once approved, the business reimburses the employees up to the available amounts.
Why Health Insurance Stipends Are Gaining in Popularity
This type of approach - providing employees a health insurance stipend instead of a specific health insurance plan - is gaining popularity in the US, especially with smaller businesses and nonprofits.
A driving force is cost. In the past, small businesses and nonprofits have relied on group health insurance to offer employee health benefits. However, continual increases in healthcare costs have adversely impacted most businesses’ ability to provide health benefits in the traditional way. Small businesses have been particularly hurt, and many have dropped group health insurance plans because they have become too expensive.
On top of cost, employers and employees find this type of arrangement attractive because:
Employees choose the health plan that best fits their family (rather than a one-size fits all plan chosen by the employer). Employees can shop for their health plan through the new state health insurance marketplaces, through a health insurance broker, or from any insurance company.
Employers fix their costs by giving employees a monthly healthcare stipend (rather than needing to contribute a certain amount to the group health insurance premiums).
Once implemented, it takes less than 5 minutes per month to administer online (much less time and administrative commitment compared to a group health insurance plan).