Employees very quickly come to think of this stipend as part of their regular wages instead of a formal benefit. And they are technically correct in viewing it this way—this is additional compensation that is being provided. It’s not a healthcare benefit, and it’s not given as a pre-tax benefit. The employee may be extremely grateful that you are providing them this “benefit,” but they quickly start seeing it as a part of their pay and don’t think about it as a benefit they’re receiving.
If you add a formal healthcare benefit in the future, logically you’d want to stop providing the healthcare stipend. Unfortunately, it can be tricky to remove the stipend. Employees usually feel they are receiving a pay cut instead of a new benefit.
Due to the fact that a health stipend is taxable income, this additional compensation must be included in the calculation of overtime. The overtime rate has to take into account not just the employee’s standard hourly rate, but all forms of compensation that are received. This includes the extra healthcare stipend compensation. The end result is that giving a healthcare stipend to a non-exempt employee can increase your payroll beyond the flat monetary amount you agreed to provide.
With no tax benefits associated with this option, both you and the employee must still pay your respective payroll taxes on the full amount of the stipend. If you try to make a benefit like this pre-tax without going through the proper channels, the government will see you as “out of compliance” and will subject you to fines. If you want a pre-tax benefit, you need to utilize a group health plan or an HRA.
The stipend is simply a fixed amount of taxable income that is often listed separately on an employee’s paystub. Just like the rest of their pay, the employee can choose to spend this on anything they wish. In other words
You cannot require employees to spend this additional income on medical expenses or require proof of insurance as a condition of eligibility.
If you go down the road of trying to make this a reimbursement or requiring proof of insurance, that brings you under the ACA rules and your stipend suddenly becomes an unlawful health plan.
Employers need to be careful when offering this as a benefit, since not offering it equally across the board could result in a potential discrimination claim. For example, if you said, “Yes” to a request for a stipend from a male associate doctor, and subsequently said, “No” to a request for a stipend from a female associate, the female associate may be able to argue she was treated unfairly due to her gender.
You can certainly offer a stipend. It’s extra compensation that you are choosing to provide. Because we’ve seen it cause the types of problems referenced above here at CEDR, we generally do not recommend it. However, benefit decisions for your business are ultimately up to you.
Supplemental insurance plans can stand on their own or compliment any of the above healthcare options. Supplemental insurance plans—such as short-term disability, hospital insurance, cancer or critical illness insurance—provide employees with cash benefits meant to meet costs not typically covered by other forms of insurance.