Today, it is common for small employers to help employees with their personal health insurance - instead of contributing to a group health insurance policy. In fact, only 54% of small and midsized employers (with fewer than 200 employees) offer traditional health insurance coverage.
As employers increasingly adopt ways to help employees with health insurance, one approach is to give employees cash for health insurance. Can you do this? Yes. Are there rules to follow? Absolutely.
This article outlines four simple rules to consider when giving employees cash for health insurance (or reimbursing employees for health insurance). Follow these rules to avoid hefty penalties and fees.
Rules for Giving Employees Cash for Health Insurance
If you would like to give employees money for health insurance, follow these two simple rules:
Do not ask employees to submit receipts.
Treat the raise as taxable income.
It is important to remember that under new health reform rules, an employer cannot directly reimburse employees for their personal health insurance (outside of a compliant reimbursement plan, that is).
To give employees cash for health insurance the right way, provide a stipend for health insurance. With a health insurance stipend, all similarly situated employees receive a fixed, taxable stipend to purchase individual health insurance, whether or not they actually purchase health insurance. Another way to help employees with health insurance is with a reimbursement plan.
Rules for Reimbursing Employees for Health Insurance
If you would like to reimburse employees for health insurance, follow these two simple rules:
Use a formal reimbursement plan (such as a Small Business HRA).
Ensure the plan follows applicable federal group health plan rules (ex: ERISA, HIPAA, PPACA, and COBRA).
How does a reimbursement plan work? With a reimbursement plan, employees are granted a fixed allowance amount to purchase individual health insurance, but only receive money if they actually purchase health insurance. Employees purchase their own individual health insurance policy and submit proof to their employer (or the employer's third-party provider). Employees receive monthly reimbursements up to their allowance amount.
An added bonus? Reimbursements are tax-free to employees and tax-deductible to the employer.
Tip - Self-service health reimbursement software can make administration and compliance easy.
Can an employer provide employees cash or reimbursement for health insurance? Yes, but follow these four rules to avoid costly penalties and fees.