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Ask The Experts: Health Insurance for Employees

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Q: I’m about to hire my first employee and I have a few questions. Am I required to provide health insurance? Can I provide a health insurance stipend and have that qualify as providing health insurance? What is a reasonable amount to provide as a health insurance stipend?

A: You are not required by law to provide health coverage 
to your workers because of your business size. That is your choice as the employer. You have a few options if you’d like to help your employee with health costs.

1. Determine how much you want to give them to put toward health costs and simply add it to their salary.

2. Look into setting up a defined contribution health plan for your business. As the employer, you would designate how much you will contribute to each employee’s health insurance. You would then have to provide your employee(s) with insurance plan options and allow them to pick the plan that works best for them. This option is more attractive to businesses with a larger number of employees and the financial and staff resources to manage a benefit plan.

3. Set up a Health Reimbursement Arrangement (HRA) for your employee. An HRA is a written plan that allows you to reimburse your employees with a preset amount of dollars to go towards health care costs. 

An HRA plan is a way to provide some financial benefit to your new worker to use towards health costs. For example, you could set up an HRA and designate $500 per year as the amount that you can afford to reimburse to your employee for health care costs. The employee could then purchase health insurance, go to a doctor for a check-up, purchase prescriptions, visit an urgent care center, etc. As long the cost qualifies as an allowable medical expense according to IRS rules, they simply bring the receipt to you and you reimburse them the cost with a company check up to the limit of $500 that you had set. Then you get the benefit of deducting those costs as business expenses.  

One thing to note is that an HRA has non-discrimination rules, meaning that if you hire another employee, you are required to provide them with the same financial benefit noted in the HRA. You can learn more and set up an HRA for free through the NASE’s HRA 105 program.

As to what is a reasonable amount for you to contribute to health insurance costs of your workers, that is a decision that should be made based on the budget for your business. You can find information regarding the cost of coverage in each state from The Kaiser Family Foundation.

Kristie Arslan, NASE Health Reform Expert

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