The Healthcare Stipend Explained & Other Alternatives
Are healthcare stipends right for your company or is there a better option? Here's what you need to know.
Our 2023 Benepass Benefits Benchmarking Guide reveals insights on top pre-tax and perks programs, average stipend contributions, and benefits design so you can design more competitive benefits.Get the guide
Medical costs have risen by 4.85% each year this century, far outstripping the 2.85% increase in annual GDP. Many businesses are struggling to keep up, with some switching to high-deductible healthcare plans for their employees and others preferring healthcare stipends to keep benefits costs in check.
But with medical bills the top cause of bankruptcy in the U.S., stipends alone may not be enough to protect your employees’ physical, mental, and financial health. This guide will explore how healthcare stipends work and some viable alternatives that truly support your workforce.
A healthcare stipend is a fixed, taxable amount of money that employees may use to buy health insurance or put toward out-of-pocket costs such as unexpected medical bills. A stipend is not the same as health insurance, although employers intend their employees to use the benefit to obtain medical coverage.
When employers offer a healthcare stipend, they give employees the option to choose their own individual health plan using the stipend as an allowance for costs. The stipend sum arrives in the employees’ paychecks, just like their regular wages. From here, the ball is in their court to find a health plan that meets their budget and individual or family needs.
The value of the stipend will depend on the employer but may be enough to cover an individual health plan’s full cost or contribute a significant amount toward a family policy.
Healthcare stipends have several drawbacks, but they may be a tempting option in the following situations:
Companies may offer a monthly stipend to cover all healthcare costs. Alternatively, they may break “healthcare” down into smaller, more specific stipends, such as:
Health and wellness stipends both focus on physical and mental well-being. However, there are key differences in how employers expect their workers to use cash stipends.
Health stipends are specifically allocated to cover medical-related expenses related to illness, injury, or disease. Employers offering this stipend intend to provide financial support to employees who need medical attention or need the money to pay for screenings and other diagnostic tests that may prevent medical intervention in the future.
Wellness stipends are more holistic, encompassing a broader range of expenses contributing to maintaining a healthy lifestyle. Wellness stipends cover different areas of well-being, such as:
A healthcare stipend provides little reassurance that employees are spending it on health insurance. Employers can’t require that employees spend it on health insurance or ask for proof that employees used it to purchase a health insurance policy. With this in mind, a wellness stipend may be better suited for nice-to-have wellness activities which are more flexible in nature. For healthcare, medical insurance is a step up from a stipend; it gives you peace of mind that your employees’ medical needs are taken care of in any circumstance.
Healthcare stipends are typically too basic to fully protect your employees’ health, and there’s red tape to consider, too. Check out these six points before you opt for a stipend in lieu of a health insurance policy:
A lifestyle spending account is an excellent way to offer an assortment of wellness benefits. Some companies may choose to incorporate medical expenses into their program. However, including certain Section 213 (d) expenses could create a compliance issue as your LSA would become a health plan subject to ERISA regulations.
To avoid triggering these group health plan laws, exclude medical expenses such as medical screenings, vision or dental premiums, and prescription medication from your LSA.
Whether you’re paying a stipend or healthcare premiums, you’ll want to maximize the value of every dollar you spend to ensure you’re protecting your employees’ health and your company’s future. But unfortunately, the IRS treats cash stipends as taxable income, diminishing the value of your dollar spend by 30%.
Example: Company A and Company B are both small businesses with different approaches to offering healthcare. Company A provides a $100 monthly stipend to each of its eight employees, resulting in a total stipend spend of $800 per month for the team. However, this stipend is subject to various types of taxes.
In Company A’s case, the stipend is subject to a 25% employee income tax of approximately $200 for the month. Additionally, there is a 15% employer payroll tax, totaling about $120. Therefore, the total taxes incurred on the stipend amount to $320.
Company B approaches healthcare by offering reimbursements through a Health Reimbursement Arrangement (HRA). This strategic choice allows employees to put every dollar Company B spends toward health insurance and medical expenses, ensuring they can maximize the benefits of the reimbursement. By doing so, Company B and its employees avoid employee income and employer payroll taxes, saving $320 per month.
Offering a stipend instead of enrolling your employees in a health insurance plan puts the onus on them to arrange their individual coverage. Lona Alia, Head of Revenue at SafetyWing, explains why this could be a mistake:
“Some founders and companies believe that if you pay people well enough, they will figure out things like health insurance themselves. However, that could not be further from the truth. When you leave people to figure this out on their own, they will procrastinate because health insurance is something that has been pretty complex to figure out.”
When your benefits team handles health coverage, your employees have somewhere to turn with their questions and concerns. Leave them to arrange their own health insurance, and you’re creating extra admin and stress for your employees on top of their busy workloads.
Employers cannot require employees to provide proof that they used the stipend to purchase individual health insurance. This means employees may not always use the stipend as intended. Lona Alia warns:
“Most people are not really using it; they’re just putting it in their bank account. Whether it’s $100 or $200, they’re not putting it toward their health. A stipend is not the same as health insurance because you leave the burden with the team member versus actually taking the responsibility for you as a company.”
It’s understandable, especially during a recession or cost of living crisis, that some employees may need to spend the money on paying spiraling energy bills or putting food on the table. Beware: Changing your health benefits structure down the line to remove the stipend could feel like a pay cut.
What happens when an employee receives an unexpected medical bill, has spent their stipend elsewhere, and has no health coverage? Of the 1 in 5 Americans hit with a surprise healthcare bill in 2022, 22% paid over $1,000. And 1 in 4 adults skipped or delayed seeking medical care due to financial concerns, putting their health and company productivity at risk.
Group health insurance policies drive down the cost of health coverage, allowing employers to negotiate better rates for their employees than an individual policy. The overall cost depends on factors such as age, state of residence, smoker status, and scope of coverage.
Companies choose from types of group health insurance plans, including:
Each group health plan has a variety of features to consider, with companies able to discuss costs and options with their provider. If you choose to offer a health stipend instead of arranging group health coverage, this removes any bargaining you’d be able to do on behalf of your employees. Their health insurance premiums will likely be more expensive when taking out individual health insurance.
Lona Alia explains that coverage can also vary wildly depending on location, eliminating equity from this aspect of your compensation package.
“The problem is that insurance needs to be negotiated and provided mostly by companies because you can get a better price, you can get on a better plan, and really the employee and contractor has somewhere to go to if they have any questions.”
A well-rounded health benefits package matters to job seekers. In a crowded marketplace, offering health benefits in a comprehensive plan instead of a health stipend could make you more appealing to top talent in your industry. Here, Coach Vanessa Rosenblum of Pro REA Staffing talks about her experience of advising benefits teams in the real estate niche:
“I did a survey recently where I asked targeted job seekers what benefits were a requirement for them to consider a position. 85% said health insurance (at least 50% paid by the employer). Most of my clients don’t offer benefits, and it’s still not that common in the real estate space, so if you do, you have a huge competitive advantage over other employers competing for the top talent.”
Of course, the opposite is also true: fail to offer health coverage, and you could be missing out on highly skilled candidates.
With the drawbacks of healthcare stipends in mind, check out these three viable alternatives:
A health reimbursement arrangement (HRA) is a tax-free alternative to a stipend, allowing your employees to customize their healthcare package based on their circumstances, pre-existing conditions, and life stage.
Traditionally, reimbursement policies require employees to pay for medical expenses upfront before filing a reimbursement claim. The obvious downside of this approach is that many employees don’t have access to the funds required for expensive bills and could go into debt waiting for the reimbursement to be processed.
Instead, a modern alternative, such as the Benepass HRA, uses a card-first approach. You’ll offer tax-free funds to employees who can spend them on a range of eligible healthcare expenses to meet their unique medical needs.
A health savings account (HSA) enables workers with high-deductible medical coverage to set aside pre-tax dollars to spend on health insurance. For example, the Benepass HSA connects directly to payroll, and your employees can elect their contributions during open enrollment. You’re effectively giving your people the power to decide how much of their compensation to invest in their healthcare, which will differ from person to person.
A flexible spending account (FSA) is similar to an HSA. With this account, employees contribute pre-tax dollars to use on eligible healthcare expenses. The biggest difference between an HSA and FSA is that HSAs are owned by the employee while FSAs are owned by the employer. Employees may lose unused FSA contributions at the end of the year unless their employer allows for a limited carryover, while an HSA allows employees to roll over their unspent funds to the next year. The Benepass FSA is a modern, card-first approach that makes it easy for employees to spend their funds and understand where their accounts stand.
A lifestyle spending account (LSA) allows you to offer an enticing range of wellness expenses that a formal medical plan wouldn’t include. Employers can offer various categories of eligible expenses, such as massages, gym memberships, online cognitive behavioral therapy, fitness equipment, guided meditations, and more. Remember: An LSA should not be used as an alternative to comprehensive medical coverage but is a useful way to expand your benefits offering and keep employee well-being at the heart of your company culture.
To learn more about how companies are designing their LSAs and using flexible benefits to support employee wellness, download the 2023 Benepass Benefits Benchmarking Guide. The guide breaks down the types of benefits that companies of various sizes and industries are offering.
Stipends are a popular way to distribute employee benefits. They’re cost-effective, easy to administer, and flexible. But when it comes to healthcare, stipends are rarely the best fit.
The alternative? Benepass offers a range of benefits to protect employee health, including HRAs and HSAs, to cover the cost of healthcare, while our LSAs provide a wide range of wellness perks.