You want to provide your employees health insurance benefits, you really do. But every time you start the process of looking into it, you're quickly overwhelmed. Navigating the small business health insurance market is extremely complicated and time consuming. Even before you factor in the financial costs, the system feels like it's designed to dissuade small businesses from participating.
For many small business owners, it seems much easier to offer a health insurance stipend. You can simply add some extra money on top of the salary employees get now, and let them use it to select their own plan.
But before you take that step,consider the pros and cons of offering extra cash instead of health insurance benefits.
Pros of offering a health insurance stipend
Let's start with covering the benefits of providing extra cash to employees in lieu of health insurance:
It saves you time.
Small business owners can easily spend over 60 hours dealing with the research and management of setting up a group plan for employees. You don't have that kind of time to give to this process. Bumping up your employees' salaries is much faster and easier.
It gives employees a choice.
With group plans, everyone who participates gets the same insurance provider and plan. And many group plans have high participation rates—often up to 70%—so companies that don’t have enough employees who want to opt-in, well, you’re out of luck. If employees have doctors they see and want to be in-network or prescription medicines for that matter,, a one-size-fits-all group plan robs them of choice. If they want to choose a plan with more coverage due to expected health care events, like a planned pregnancy, they'll be out of luck.
You choose the amount.
With a group health plan, the insurance company sets the premium rates and they often require a minimum contribution of 50%. Making matters worse, health insurance premiums pretty much always trend up year after year, so trying to budget for health insurance costs long term is a losing battle. But with a health stipend, you can pick the number that fits your budget.
Everyone loves cash.
No one's sad about getting extra money. Your employees will almost certainly be pleased to get an extra boost to their paycheck. At a glance, this looks like a clear win/win scenario for all involved.
Cons of offering a health insurance stipend
Looking beyond that first glance is where things get more complicated. Offering extra cash instead of health insurance benefits has some pretty notable drawbacks:
A health stipend is taxable.
Not only are health stipends taxable, the tax on them takes a big cut. Once you add up the different types of taxes levied on employee income, your employees will lose around 35% of the cash you offer to put toward health benefits. Yikes!
That means if you wanted to offer employees $250 a month to put toward health care premiums, they'd end up with around $150 a month to spend. That wouldn't go far on the health insurance marketplaces in most states.
Employees may not use the stipend for health insurance.
You can call it a "health stipend" and clearly communicate your intended purpose for the money to your employees, but you can't really require them to put it toward health care. To them, that money will ultimately look like extra salary and they may decide to spend it on something other than health insurance—especially if the amount left after taxes doesn't cover the cost of a premium.
In spite of your best intentions, you could spend a lot of money only for your employees to still face the serious consequences of not being covered if (or more likely, when) they encounter a serious illness or injury. Suddenly, offering cash instead of insurance benefits is starting to look more like a lose/lose scenario.
You'll have to be generous to cover health insurance costs (and raise the amount every year).
If you want to provide employees with enough cash to cover premiums in your area (even after taxes take their cut), you have to be prepared to offer a lot. The average family premiums in 2023 were $23,968—a 47% increase since 2013.
If the goal of offering a health stipend is to ensure employees get the coverage they need, but you only provide a small portion of the total cost they face, employees are less likely to see it as a generous benefit, even if the costs to you are high.
The better small business health insurance option: ICHRA
For years, small businesses were stuck between a rock and a hard place when it came to the question of health insurance. Small group plans aren't a great option; but neither are health stipends. In 2020, new federal legislation opened up a new, better path: ICHRA (Individual Coverage Health Reimbursement Arrangement) For the first time, a pre-tax stipend option specific for health care just opened up.
ICHRA keeps most of the pros of a health stipend, and drops most of the cons.
- You can still determine a set amount of money to offer employees for health insurance.
- You can give them a choice in picking out the plan that's right for them.
- Your employees actually get the full amount since the stipend is pre-tax.
- You can be confident that employees will put the money toward health insurance, because that's built into how ICHRA works—they only get the money if they use it for its intended purpose.
Oh, and did we forget to mention all the time it saves you? You don't have to spend hours researching plan options and dealing with all the administrative work. And it's not like you're just passing all that work onto employees either, with the right guidance and an intuitive platform (hint: we can help with that part😉), choosing and signing up for the right plan is easy for them too.
If ICHRA sounds too good to be true, that's only because you've had to settle for less for so long. It actually is that easy. Stretch Dollar can help you through the whole process—and getting started only takes around 10 minutes. So what are you waiting for?
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