Health Insurance Stipends Pros And Cons
Written by: Elizabeth WalkerOctober 22, 2021 at 9:46 AM
Many small employers who cant afford to offer formal health benefits decide to give employees a taxable stipend to use toward healthcare. While this option is easy to administer and saves time, the value of these dollars is lessened because a health insurance stipend is considered part of employees incomenot a separate benefit.
This means that stipends have payroll and income tax implications that tax-free health benefits dont have. Whats more, employers cant require employees to prove they purchased health insurance with their stipend money.
So is a health insurance stipend a worthwhile option after all? In this article, well look at the pros and cons of taxable health insurance stipends, outline best practices, and discuss a tax-free way to offer your employees health insurance.
Want to jump ahead? Skip to a section below!
Paying Into An Employer Health Insurance Plan
There are a number of ways that an employee may pay money through their employer to help save money on expensive medical bills. This can include a portion of the premium, a health insurance savings account, and a flexible spending plan. Not all of these plans are offered by every employer and each comes with its own tax rules.
Health Coverage Costs Not To Report On W
- Dental or vision coverage that gives the choice of declining, or electing and paying an additional premium
- Dental or vision that is not integrated with a major medical plan
- Employee pre-tax contributions to a health flexible spending account
- Health Reimbursement Account contributions
- Health Savings Account contributions by the employer or employee
- Hospital indemnity or specific illness policies paid by the employee on an after-tax basis.
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Premiums Must Be Affordable
The new health care law says that your contributions to a health plan sponsored by your employer must be affordable for you, says Chip Capelli, an accountant with offices in Philadelphia and Provincetown, Massachusetts. Your definition of affordable might be different from your employers so the law includes specific guidelines:
- Premiums cant exceed 9.5% of your households income after taking your employers contributions into the equation.
- Technically, this means that if both you and your spouse work, the 9.5% applies to your combined incomes.
But as a practical matter, many employers just go by the income reported on your W-2, because they have no way of identifying exactly what your households income might be.
Standard Deduction Vs Itemized
Tax deductions are claimed and filed through your yearly tax return that is sent to the IRS for review. The IRS offers two options for declaring deductions, which include either taking the standard deduction or itemizing your medical expenses. Both will ultimately reduce your adjusted gross income and therefore mitigate the amount of taxes that you would pay. AGI is the amount you earn in a given year minus any payments for alimony, student-loan interest and other costs. Recently, the Tax Cuts and Jobs Act has increased the standard deduction amounts along with suspending some of the itemized deductions available to you. For 2020, the standard deduction amounts are:
As shown above, depending on your situation, the standard deduction is a flat-dollar reduction of your AGI. When you take this deduction, you are essentially opting out of itemizing deductions. The biggest benefit to the standard deduction is that it makes the tax-prep process much simpler. For example, if you are single, have an AGI of $70,000 and decide to take the standard deduction, then your taxable income would be $57,600.
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Board Lodging And Transportation Special Work Sites And Remote Work Locations
It is possible for an employee to work at a location that is both a special work site and a remote work location. However, the benefit can only be excluded from the employee’s income once.
If the special work site is in a prescribed zone, see Board, lodging, and transportation at a special work site.
Special work sites
Generally, a special work site is an area where temporary duties are performed by an employee who keeps a self-contained domestic establishment at another location as their principal place of residence. Because of the distance between the two areas, the employee is not expected to return daily from the work site to their principal place of residence.
A self-contained domestic establishment is a house, apartment, or other similar place of residence where a person usually sleeps and eats. It is generally a living unit with restricted access that contains a kitchen, bathroom, and sleeping facilities. The SCDE must be separate from any other living unit in the same building. A room in a hotel, dormitory, boarding house, or bunkhouse is not ordinarily considered to be a SCDE.
Usually, the GST/HST and PST applies on meals and accommodations you provide to an employee. In certain cases, such as long-term residential accommodation of one month or more, no GST/HST and PST applies. Where the GST/HST and PST does apply, include it in the value of the benefit.
Board and lodging at a special work site
Are Health Insurance Premiums Deductible On Federal Taxes
Health insurance premiums are deductible on federal taxes, as these monthly payments for coverage are classified as a medical expense. The general rule is that if you pay for medical insurance with out-of-pocket money, then you would be allowed to deduct the amount from your taxes.
For example, you would be able to take a tax deduction if you bought a federal marketplace health insurance plan and did not receive premium subsidies. Since the premiums for this Obamacare policy would be paid out-of-pocket, you could deduct the expenses while filing your taxes. If you did receive premium subsidies, then only the portion that you pay yourself would be allowed to be deducted. Below, we have identified some of the typical sources where you may get your health insurance from and if there are tax deductions available.
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Cancel Or Waive Penalties Or Interest
The CRA administers legislation, commonly called taxpayer relief provisions, that allows the CRA discretion to cancel or waive penalties or interest when taxpayers cannot meet their tax obligations due to circumstances beyond their control.
The CRAs discretion to grant relief is limited to any period that ended within 10 calendar years before the year in which a request is made.
For penalties, the CRA will consider your request only if it relates to a tax year or fiscal period ending in any of the 10 calendar years before the year in which you make your request. For example, your request made in 2018 must relate to a penalty for a tax year or fiscal period ending in 2008 or later.
For interest on a balance owing for any tax year or fiscal period, the CRA will consider only the amounts that accrued during the 10 calendar years before the year in which you make your request. For example, your request made in 2018 must relate to interest that accrued in 2008 or later.
To make a request, fill out Form RC4288, Request for Taxpayer Relief Cancel or Waive Penalties or Interest. For more information about relief from penalties or interest and how to submit your request, go to Taxpayer relief provisions.
Frequently Asked Questions Regarding W
Question: Why doesn’t the amount in Box 1 match the “YTD Earnings” listed on the bottom of my final 2014 paycheck?
Answer: The amount in Box 1 represents Taxable Earnings which is your YTD Earnings minus tax-deferred retirement contributions as well as pre-tax benefits such as medical, dental, health care reimbursement, dependent care reimbursement, parking and vision insurance.
Question: Why doesn’t Box 1 match Box 3 and Box 5?
Answer: Box 3 and Box 5 include your tax-deferred retirement contributions, Box 1 does not.
Question: Is there a simple explanation for what is in each box of my W-2?
Answer: Here is a brief explanation of what is in each box. If you believe an amount is incorrect, please contact Payroll at 240-777-8840.
Box 1: This is your taxable wage amount which is made up of your YTD Earnings minus all of your pre-tax deductions.
Box 2: This is how much federal income tax was withheld from your paychecks throughout the year and should match “Federal Withholding Tax” amount on your final 2014 paycheck.
Box 3: This is your wages that are subject to Social Security tax. This is generally your wages minus all of your pre-tax benefits up to a maximum of $117,000. If you made more than $117,000 or had any pre-tax benefits, this will not match your year-to-date earnings on your final 2014 paycheck.
Box 4: This is how much Social Security tax was withheld from your paycheck and should match the “Social Security” amount on your final 2014 paycheck.
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Small Employers Contribute Significantly Less To Family Coverage
While large employers contribute a significant amount to employees healthcare, small employers tell a different side of the story. 27% of covered workers in small firms are in a plan where the employer pays the entire premium for single coverage, compared to only 4% of covered workers in large firms. Similarly, 28% of covered workers are in a plan where they must contribute more than half of the premium for family coverage, compared to 4% of covered workers in large firms.
A likely reason for this is that small businesses simply cant afford to make the kind of contributions larger employers can. After all, even a 50% contribution may be more than whats available in a small employers benefits budget.
Considering that only 48% of firms with three to nine workers offer coverage compared to virtually all firms with 1,000 or more workers that offer coverage, small employers may also feel that they dont have enough employees to make investing in health benefits worth it at all. in order to offer a health benefit at all.
Group Term Life Insurance Policies Employer
This section applies to current, former, and retired employees.
Premiums you pay for employees’ group life insurance that is not group term insurance or optional dependant life insurance are also a taxable benefit.
A group term life insurance policy is one for which the only amounts payable by the insurer are policy dividends, experience rating refunds, and amounts payable on the death or disability of an employee, former employee, retired employee, or their covered dependants.
Term insurance is any life insurance under a group term life insurance policy other than insurance for which a lump-sum premium has become payable or has been paid. Life insurance for current employees would usually be term insurance, although it is sometimes provided for retired employees.
A lump-sum premium is a premium for insurance on an individual’s life where all or part of the premium is for insurance for a period that extends more than 13 months after the payment of the premium .
Calculating the benefit
If the premiums are paid regularly and the premium rate for each individual does not depend on age or gender, the benefit is:
- the premiums payable for term insurance on the individual’s life
- the total of all sales taxes and excise taxes, excluding GST/HST that apply to the individual’s insurance coverage
- any provincial insurance levies or sales tax that employers have to pay on some insurance premiums
Reporting the benefit
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Employers Pay 83% Of Health Insurance For Single Coverage
In 2020, the standard company-provided health insurance policy totaled $7,470 a year for single coverage. On average, employers paid 83% of the premium, or $6,200 a year. Employees paid the remaining 17%, or $1,270 a year.
For family coverage, the standard insurance policy totaled $21,342 a year with employers contributing, on average, 73%, or $15,579. Employees paid the remaining 27% or $5,763 a year.
How Does A Health Insurance Stipend Work
With a health insurance stipend, employees receive a fixed, taxable stipend to purchase individual health insurance. This allows you to give them the option of getting a health insurance policy of their choice, without having to foot the bill for group health insurance for all of your employees, which can be more cost effective for you considering rising healthcare costs. The employer’s monthly contributions are typically added to the employees paycheck as wages.
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Other Medical Expenses That Are Tax Deductible
The IRS will let you take a deduction on any medical expenses paid out of your own pocket that were ordered by a doctor or health care professional. For a complete list of acceptable medical expenses, you can visit the IRS.gov website. But, some common expenses include:
- Long-term care
- Contact lenses
- Birth control
Along with these direct medical expenses, the IRS will also allow you to deduct any travel costs that you may have incurred when going to get medical care. For example, if you have a physical therapy appointment that is one hour from your residence, you could deduct the cost of gas as a medical expense.
Pooled Registered Pension Plans
Contributions you make to a PRPP for your employees are not a taxable benefit if the plan has been accepted for registration by the Minister of National Revenue and that registration has not been revoked. Do not include these contributions in your employees employment income.
On the other hand, if you contribute to a plan that is registered under the Pooled Registered Pension Plan Act or a similar provincial act and not with the Minister of National Revenue, your contributions are a taxable benefit. They are considered to be paid in cash and are taxable, pensionable, and insurable. Deduct income tax, CPP contributions, and EI premiums.
For more information about PRPPs, go to The Pooled Registered Pension Plan .
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Determine Your Company Policy Based On Values And Capability
Your continuation of benefits policy will ultimately be determined by:
- The ongoing financial resources you are willing and able to commit to disabled employees
- Your corporate and moral responsibility to provide coverage for employees during extended periods of disability
- The result on employee morale and attitudes that a continuation of benefits policy would have
Formalizing a continuation of benefits policy may require difficult decisions, but in the end it will ensure that all employees are treated equally and fairly its essential for both the employer and employees to understand how the company will respond if an employee becomes disabled.
Healthcare Reform And You: W
Under the Affordable Care Act , employers must report the cost of employer-sponsored health care coverage on an employeeâs W-2. This W-2 reporting is informational only, intended to provide useful details on the value of an employeeâs health care benefits. At the same time, this reporting does not mean that coverage is taxable rather, this amount continues to be excluded from an employeeâs taxable income.
Who is affected?
According to the most recent IRS guidance, large employers who issue 250 or more W-2s for calendar year 2014 are required to report the value of employer-sponsored health insurance. Though mandatory for these employers, the reporting is optional for small employers, or those who issue fewer than 250 W-2s. In fact, if youâre a small employer, youâve qualified for transition relief from this reporting requirement from tax year 2012 to date, until the IRS issues new guidance.
Specifically, the reporting applies to employers who provide âapplicable employer-sponsored coverageâ under a group health plan. This includes private companies, churches, tax-exempt organizations, and federal, state and local government entities.
If youâre affected, here are some tips to keep in mind:
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What Happens To My Health Insurance If Im Fired After Filing For Workers Comp
Unfortunately, it is still possible for you to be fired by your employer even if you have an open workers compensation case. If you are terminated, you can expect your health insurance benefits to end the same way that they would for any terminated employee.
You have the option of temporarily continuing your health insurance under the Consolidated Omnibus Budget Reconciliation Act . Your health plan administrator must give you a notice stating your right to choose to continue benefits provided by the plan. You then have 60 days to accept coverage or lose all rights to those benefits.
If you elect to continue coverage through COBRA you will have to pay the full cost of the coverage plus a 2% administrative charge. If your employer was paying the bulk of your health insurance expense before your termination, you can expect that health insurance through COBRA will likely be much more expensive than you are used to.
COBRA generally applies to all group health plans maintained by private sector employers or by state and local governments. Check with your state to see what kind of state continuation program is in place. Either way, you may want to shop around and consider other insurance companies to find your best options for obtaining private insurance.
Accommodation Or Utilities Provided By The Employer
If you provide accommodation or utilities free of charge, it is a taxable benefit to your employee. The method you use to determine the value of the benefit depends on whether or not the place in a prescribed zone has a developed rental market.
Places with developed rental markets
Some cities and towns in prescribed zones have developed rental markets. When that is the case, you base the value of the benefit for any rent or utility you provide on its fair market value.
The cities and towns in prescribed zones that have developed rental markets are:
Places without developed rental markets
In places in prescribed zones without developed rental markets, you have to use other methods to set a value on the housing benefit. The method you use depends on whether you own the residence or rent it from a third party.
If you provide both rent and utilities and can calculate their cost as separate items, you have to determine their value separately. Add both items to get the value of the housing benefit.
If your employee reimburses you for all or part of their rent or utilities, determine the benefit as explained below. Subtract any amount reimbursed by your employee and include the amount that remains in their income.
Accommodations you own
If you own a residence that you provide rent-free to your employee, report as a benefit whichever of the following amounts is less:
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