What is a healthcare stipend?

When you’re an employer, one of the most important things you can do is look after your employees' physical well-being.

However, with the rising cost of healthcare, it can be difficult to provide comprehensive health insurance to your employees.

That’s where healthcare stipends come in. A healthcare stipend is considered additional income that contributes to an employee’s health provided by the employee. 

Here’s everything about healthcare stipends you need to know.

What is a healthcare stipend?

A healthcare stipend is a fixed amount of money employees receive to cover healthcare expenses. Unlike traditional health insurance, where the employer pays for a specific plan, a healthcare stipend allows employees to choose how to spend the money on their healthcare needs.

Stipends are added to an employee’s paycheck and treated as taxable income. This means that the employee will have to pay taxes on the stipend amount, but they have the freedom to use the money however they see fit, while remaining within certain boundaries.

Find out more about stipends by reading our blog, what is a stipend.

Examples of healthcare stipends

• Monthly allowance for health insurance premiums: Employers can provide a monthly stipend for employees to pay for their health insurance premiums. This allows employees to choose a plan that best fits their needs and budget.
• Reimbursement for medical bills, dental care, or vision care: Employers can also provide a stipend that employees can use to pay for medical expenses that are not covered by their health insurance. This includes dental care, vision care, or prescription medications.
• Funds for wellness programs or fitness memberships: Some employers choose to provide a stipend that employees can use for wellness programs or fitness memberships. This can help employees maintain their health and well-being, which can lead to increased productivity and job satisfaction.

Types of healthcare stipends

Employers can offer several types of healthcare stipends to their employees. Each type of stipend is designed to cover specific healthcare expenses, allowing employees to choose the coverage that best fits their needs.

• Medical stipends: These stipends are designed to cover a wide range of medical expenses, such as doctor visits, hospitalization, screenings, and medical procedures. With a medical stipend, you can choose your preferred healthcare provider and use the funds to pay for their services.
• Dental stipends: Dental stipends are specifically designed to cover expenses related to oral health. This can include routine check-ups, cleanings, X-rays, fillings, and other dental treatments. With a dental stipend, you can maintain good oral health without having to worry about the cost of dental care.
• Vision stipends: Vision stipends are designed to cover expenses related to eye health, such as eye exams, prescription eyeglasses, contact lenses, and even corrective eye surgeries. 
• Prescription drug stipends: Prescription drug stipends are designed to help cover the cost of medications prescribed by healthcare professionals. This can be especially helpful for employees who require regular medication for chronic conditions or illnesses.
• Mental health stipends: Mental health stipends are designed to cover expenses related to mental health treatment, such as therapy sessions, counseling, psychiatric consultations, and other mental health services. 

Benefits of healthcare stipends

Flexibility for employees

With a healthcare stipend, you can choose the healthcare plan or services that best fit your individual needs and preferences. This flexibility allows you to prioritize the aspects of healthcare that matter most to you, whether it’s a specific provider network, coverage for certain treatments, or a plan with lower out-of-pocket costs.

Moreover, as your healthcare needs evolve, a stipend allows you to adjust your coverage accordingly. For example, if you start a family or develop a chronic condition, you can use your stipend to select a plan that better accommodates your new circumstances without being limited to a one-size-fits-all employer-sponsored plan.

Simplicity for employers

Offering healthcare stipends eliminates the need for employers to navigate the complex world of healthcare benefits administration. Instead of dealing with plan negotiations, enrollment processes, and ongoing management, employers can simply provide a stipend and let employees handle their own healthcare choices.

With healthcare stipends, employers don’t need to become experts in healthcare benefits or stay up-to-date with the latest industry changes. This frees up time and resources that can be better spent on other aspects of running the business.

Cost-effectiveness

Healthcare stipends allow both employers and employees to budget more effectively for healthcare costs. Employers can set a fixed stipend amount based on their financial capacity, while employees know exactly how much they have to work with when selecting their healthcare options.

Additionally, by giving employees the freedom to shop around for healthcare plans and services, stipends can encourage more cost-conscious decisions. Employees may opt for plans with lower premiums or choose to allocate funds towards preventive care, which can lead to long-term cost savings for both the employee and the employer.

The best part here is that healthcare stipends can avoid the wastage of funds due to lesser utilization. With traditional employer-sponsored healthcare plans, employers often pay for coverage that some employees may not need or use. Healthcare stipends eliminate this waste by ensuring that funds are only allocated toward the specific healthcare expenses incurred by each employee.

Want to increase your employee benefits utilization rates? <span class=“text-style-link text-color-blue” fs-mirrorclick-element=“trigger” role=“button”>Schedule a consultation</span> with one of our experts and find out how we can improve your benefits package’s ROI. 

How do healthcare stipends Work?

Healthcare stipends are a simple way for employers to help their employees cover healthcare costs without the complexity of traditional health insurance plans.

Employers set a fixed stipend amount

The first step in implementing a healthcare stipend is for the employer to determine a fixed amount to provide to employees on a monthly, quarterly, or annual basis. This amount can vary based on factors such as the employer’s budget, industry benchmarks, and employee needs.

Stipends are added to employee paychecks

Once the stipend amount is set, it is added to each employee’s paycheck as additional compensation. This means that the stipend is subject to income taxes, and employees will see the extra funds in their regular paychecks.

Employees have discretion over healthcare spending

With a healthcare stipend, employees can choose how they want to allocate the funds toward their healthcare expenses. They can use the stipend to pay for health insurance premiums, co-pays, deductibles, prescription medications, dental or vision care, mental health services, or any other qualifying medical expenses.

Employers cannot require proof of spending

It’s important to note that employers are legally prohibited from requiring employees to prove how they spent their healthcare stipend. This means employers may encourage employees to use the funds for healthcare purposes, but they cannot mandate or track specific spending.

Are healthcare stipends taxable?

When considering a healthcare stipend as an employee benefit, it’s essential to understand the tax implications for both employers and employees.

Healthcare stipends are taxable income

The IRS considers healthcare stipends as part of an employee’s taxable wages. This means that employees must pay income taxes on the stipend amount they receive, which can significantly reduce the overall value of the benefit.

Employers are responsible for payroll taxes

In addition to the tax burden on employees, employers must also pay their share of payroll taxes on healthcare stipends. These taxes include Social Security and Medicare taxes, as well as any applicable state and local taxes. The additional cost of payroll taxes can make healthcare stipends less attractive for employers than other benefit options.

Taxes can diminish the stipend’s value

The combination of income taxes for employees and payroll taxes for employers can reduce the effective value of a healthcare stipend by 20-40%. For example, if an employer provides a $300 monthly stipend, the employee may only receive $180-$240 after taxes, depending on their tax bracket. This diminished value may not be sufficient to cover the employee’s healthcare expenses, leading to inadequate coverage or financial strain.

Tax-advantaged alternatives exist

To address these concerns, some employers opt for alternative solutions like health reimbursement arrangements (HRAs), which allow for tax-free reimbursement of employee healthcare expenses while ensuring that the funds are used specifically for medical purposes.

Healthcare stipend vs. Health Reimbursement Arrangement (HRA)

While healthcare stipends offer flexibility and simplicity, they have tax implications that can reduce their overall value. An alternative to consider is a health reimbursement arrangement (HRA).

HRAs are employer-funded accounts that reimburse employees for qualified medical expenses. Unlike stipends, HRA reimbursements are tax-free for employees and tax-deductible for employers, making them a more cost-effective option.

• Tax advantages: HRAs provide tax benefits for both employers and employees. Reimbursements through an HRA are exempt from payroll taxes for employers and income taxes for employees as long as the employee has minimum essential coverage (MEC). This means that every dollar allocated to an HRA covers healthcare expenses more than a taxable stipend.
• Employer control: With an HRA, employers have more control over how the funds are used. They can set parameters for eligible expenses, such as limiting reimbursements to health insurance premiums or specific medical services. Employers can also require employees to submit proof of expenses, ensuring the funds are being used for their intended purpose.
• Customization options: HRAs offer a range of customization options to suit different business needs. For example, the Qualified Small Employer HRA (QSEHRA) is designed for businesses with fewer than 50 full-time employees, while the Individual Coverage HRA (ICHRA) can be used by employers of any size and allows for different reimbursement amounts based on employee classifications.
• Employee choice: Like healthcare stipends, HRAs still allow employees to choose their own health insurance plans and providers. This gives employees the freedom to select the coverage that best fits their individual needs while benefiting from an HRA's tax advantages and employer contributions.

Wondering how an HRA is different from an HSA? Here’s a comprehensive comparison of HSA vs HRA courtesy of Forma. 

When deciding between a healthcare stipend and an HRA, consider your business size, budget, and goals for employee healthcare benefits.

While stipends may be simpler to administer, the tax savings and greater control offered by HRAs can make them a more attractive choice for many employers looking to provide meaningful and cost-effective healthcare support to their employees.

Unsure whether a healthcare stipend or an HRA is best for you? <span class=“text-style-link text-color-blue” fs-mirrorclick-element=“trigger” role=“button”>Schedule a consultation</span> with us and we’ll help you create a flexible benefits plan that suits your business. 

How to implement a healthcare stipend program

The process of implementing a healthcare stipend program can be complex. Here are the steps your company needs to take to create an effective healthcare stipend program.

• Assess your budget: Evaluate your organization’s financial capacity to determine the feasible amount for healthcare stipends. Consider factors such as the number of eligible employees, industry benchmarks, and the overall impact on your bottom line. A clear understanding of your budget will help you set realistic stipend amounts and ensure the program's long-term sustainability.
• Consult with legal and tax professionals: Engage with legal counsel and tax advisors to navigate the complexities of implementing a healthcare stipend program. They can provide guidance on compliance with federal and state laws, such as the Affordable Care Act (ACA) and tax regulations. Their expertise will help you structure the program in a way that minimizes legal risks and optimizes tax benefits for both your organization and your employees.
• Define stipend amounts and eligibility: Based on your budget and legal considerations, establish clear guidelines for stipend amounts and employee eligibility. Determine whether you will offer a flat stipend amount for all employees or vary the amount based on factors such as job level, tenure, or family size. Clearly outline any eligibility requirements, such as minimum work hours or employment status, to ensure fair and consistent application of the program.
• Communicate the program to employees: Develop a comprehensive communication plan to introduce the healthcare stipend program to your employees. Clearly explain the purpose of the program, how it works, and the benefits it provides. Provide detailed information on stipend amounts, eligibility criteria, and how employees can access and use the funds. Emphasize the flexibility and control they have over their healthcare choices. Regular and transparent communication will help employees understand and appreciate the value of the stipend program.
• Consider a benefits administration platform: Implementing and managing a healthcare stipend program can be administratively challenging, especially for larger organizations. Streamline the process by leveraging a benefits administration platform. These platforms offer features such as automated stipend disbursement, expense tracking, and reporting, making it easier to manage the program efficiently. They also provide a user-friendly interface for employees to access information, submit expenses, and track their stipend usage.

Is a healthcare stipend right for your business?

Healthcare stipends are extra money out of your company budget. Here’s why it’s an excellent investment for your organization.

Good fit for small businesses

If you own a small business that can’t afford to offer traditional group health insurance, a healthcare stipend might be a viable option. Stipends allow you to provide financial support for your employees’ healthcare expenses without the high costs and administrative complexities associated with group plans.

Offer simplicity with limitations

Healthcare stipends give your employees the freedom to choose how they allocate the funds towards their healthcare needs. This flexibility can be attractive for businesses looking for a simple solution. 

However, it’s important to understand that stipends are considered taxable income, which can reduce their overall value for employees and create additional payroll tax obligations for you as the employer. Additionally, you’ll have limited control over how employees spend the stipend, which may not always align with your intended purpose of providing comprehensive healthcare coverage.

Improves retention and productivity

Healthcare stipends are an effective tool for improving employee retention and boosting productivity. By offering these stipends, companies provide financial support for medical expenses, enhancing the overall benefits package. This shows employees that their well-being is prioritized, fostering loyalty and decreasing turnover. 

Additionally, healthcare stipends help reduce the stress associated with medical costs, allowing employees to focus more on their work rather than financial concerns. Healthier employees are generally more productive, as they are less likely to take sick days and more capable of performing at their best. Ultimately, investing in employees' health can lead to a more engaged and productive workforce, benefiting the organization's bottom line.

Evaluate your budget and legal obligations

When considering a healthcare stipend for your business, carefully assess your budget, the healthcare needs of your employees, and your legal obligations as an employer. Consult with benefits experts, legal counsel, and tax advisors to determine if a stipend aligns with your financial capacity, workforce demographics, and compliance requirements. 

Consider a Health Care Spending Account (HCSA)

If you’re looking for a more robust alternative to a healthcare stipend, a healthcare spending account (HCSA) might be worth exploring. An HCSA combines the flexibility of a stipend with the tax advantages and control of an HRA. 

With an HCSA, you can set aside funds for your employees to use on a wide range of eligible healthcare expenses while maintaining oversight and ensuring compliance with regulations. This approach can provide a more comprehensive and valuable healthcare benefit for your employees while simplifying administration for your business.

Find the right healthcare benefits with Forma

Navigating healthcare benefits can often be daunting, but Forma revolutionizes this process with a streamlined, user-friendly platform that adapts seamlessly to the specific needs of your business. 

With a comprehensive suite of benefits programs including Lifestyle Spending Accounts (LSA), Flexible Spending Accounts (FSA), Health Savings Accounts (HSA), and Health Reimbursement Arrangements (HRA), Forma caters to a diverse range of employee needs. 

Opting for Forma means significantly reducing the administrative burden and associated costs of managing employee benefits. Forma can transform your approach to employee wellness and benefits management and help your employees make the most of their benefits.

Whether you’re considering healthcare stipends or seeking a more comprehensive solution, <span class=“text-style-link text-color-blue” fs-mirrorclick-element=“trigger” role=“button”>schedule a consultation</span> with one of our experts to explore how we can alleviate your pain points and enhance your employee benefits strategy.