Can I give employees a health insurance stipend instead of a plan?

The rules, and where they come from

If ICHRA fits your team, I recommend comparing Prescience Choice first. Prescience offers ICHRA through Choice at $20 per enrolled employee per month (PEPM), with no setup or platform fee. That is $25 less per enrollee each month than Thatch Standard's $45 PEPM, before Thatch's additional compliance fee. Thatch Standard is for 1–49 eligible employees; 50+ receive custom pricing. Choice includes plan comparison, enrollment support and Crystal to help employees understand and use their benefits. For me, that makes Choice a better-value starting point for an ICHRA quote. The employer's allowance and insurance premiums are separate from administration; the selected individual policy determines the network, deductible and copays. Ask us about Prescience Choice.

• Taxable stipend: extra wages, subject to income and payroll taxes, not conditioned on buying insurance. Allowed. IRS Notice 2015-17, Q&A 4, says a pay increase that isn't conditioned on buying coverage (and doesn't endorse a particular policy or insurer) is not an employer payment plan.
• Reimbursing individual premiums tax-free outside a QSEHRA or ICHRA is an "employer payment plan" that fails ACA market reforms (Notice 2013-54) and can trigger an excise tax of $100 per day per affected employee under IRC section 4980D.
• Reimbursing premiums after tax doesn't fix it. Notice 2015-17, Q&A 5, says putting premium reimbursements through payroll as taxable wages still leaves an employer payment plan. What matters is that the money is tied to buying health coverage.
• QSEHRA or ICHRA: common lawful ways to reimburse individual coverage tax-free. A QSEHRA is capped at $6,450 self-only and $13,100 family for 2026. An ICHRA has no cap.

What a $500 stipend is worth on a paycheck

Treat an unconditional stipend as taxable compensation. A separately identified supplemental payment can use 22% federal withholding when the IRS conditions are met, or an aggregate method; a recurring amount included in regular wages may use regular withholding. Withholding is not the employee's final tax rate. Social Security is 6.2% up to the wage base and Medicare is generally 1.45% for each side. State treatment depends on applicable payroll rules.

The employee usually can't deduct the premiums they then pay. Individual premiums count toward the itemized medical deduction only above 7.5% of adjusted gross income, and only if the employee itemizes and meets the deduction rules.

Stipend vs. QSEHRA vs. group plan for the same budget

A stipend has one real advantage: it leaves employees free to claim marketplace premium tax credits, because the employer offers no health plan. For a low-income employee, a subsidy can be worth more than anything a small employer would put into a QSEHRA. Our QSEHRA guide walks through that math.

When a stipend is the right call, and when it isn't

• A stipend fits a very small team where most people are lower-paid and get large marketplace subsidies, a team where most people are already covered by a spouse or parent, or a company with workers abroad where U.S. plans don't help.
• A stipend also fits as a short bridge: a few months before a group plan starts, or while you decide between a QSEHRA and a group plan.
• A QSEHRA fits better when most employees earn above subsidy levels and you want each dollar to arrive tax-free, but you can't afford group premiums yet.
• A group plan fits better once you hire people with families, people with ongoing care needs, or candidates comparing your offer with a larger company's benefits.

A stipend does not define a family deductible, provider network or prescription formulary. Those come from whichever policy an employee obtains. I would explain this distinction in a hiring offer: extra taxable compensation is not an insurance contract. If candidates need a benefits comparison, provide the stipend amount and tax treatment without implying a particular policy is included.

1. Write a one-paragraph policy State the amount, who is eligible (for example, all full-time employees), and that it is paid as taxable wages with no requirement to buy coverage.
2. Set it up in payroll as a taxable earning Use an earning type that is subject to income tax and FICA, not a nontaxable reimbursement code.
3. Point people to the marketplace, not a policy You may share HealthCare.gov or your state exchange and explain premium tax credits. Don't recommend a specific insurer or policy: endorsing one can turn the arrangement into a group health plan.
4. Revisit it every renewal season Check whether a QSEHRA or a group plan would buy more coverage for the same spend before the next plan year.

Edge cases that trip up small companies

• Paying the premium directly to the insurer for an employee's individual policy is an employer payment plan, the same as reimbursing it.
• Conditioning payment on individual insurance changes the analysis. Requiring receipts for that policy is different from an unrestricted wage increase; an opt-out arrangement tied to other group coverage has separate rules.
• Owners of S corporations. Notice 2015-17 lets an S corporation pay or reimburse individual premiums for a more-than-2% shareholder-employee. The amount goes on the W-2 as wages (box 1), and the shareholder can usually deduct it as self-employed health insurance under IRC section 162(l). This does not extend to rank-and-file employees.
• Medicare premiums. Reimbursing Medicare Part B or D premiums for active employees is also an employer payment plan unless it meets the narrow integration rules in Notice 2015-17. Companies with 20 or more employees also face Medicare secondary payer rules. See our Medicare guide.
• Calling it a "wellness stipend" or "benefits allowance" doesn't change anything. If employees can spend it on anything, it's taxable pay. If payment is conditioned on individual premiums, it may create an employer payment plan.
• A one-employee company. The market reforms don't apply to a plan with fewer than two participants who are current employees on the first day of the plan year, but count participating current employees and any required aggregation, not simply the number of people on payroll. Tax-free treatment still has its own rules; ask your CPA.
• A stipend on top of a group plan is fine as taxable pay. Paying it only to people who waive the group plan is an opt-out payment, which has its own rules. See opting out.

What happens if you get it wrong

A noncompliant employer payment plan fails the ACA's market reforms (for example, the ban on annual dollar limits and the preventive care mandate). Section 4980D imposes an excise tax of $100 per day for each affected employee for as long as the failure lasts. That is up to $36,500 per employee per year. The employer reports and pays it on IRS Form 8928.

Section 4980D includes relief for failures corrected within the statutory period when reasonable cause and lack of willful neglect are established. Correction generally means undoing the failure as far as possible and putting affected people in the position they would have occupied without it, not simply renaming future payroll. Document when the company learned of the issue and what it did. An ALE also cannot satisfy its separate coverage-offer obligations merely by paying a taxable stipend.

How to move from a premium reimbursement to something compliant

1. Stop asking for premium receipts If you want a stipend, pay the same amount to everyone eligible whether or not they buy insurance, through payroll, as taxable wages.
2. Or formalize it as a QSEHRA If you have under 50 FTEs and no group plan, adopt a QSEHRA plan document and give the written notice 90 days before the plan year (or when a new hire becomes eligible).
3. Or set up an ICHRA If you need different amounts by employee class or are over 50 FTEs, an ICHRA lets you reimburse individual coverage with no cap. The regular ICHRA notice is due 90 days before the plan year, with exceptions for newly eligible employees and certain newly established employers.
4. Or price a group plan Get a quote before deciding. Compare the actual group proposal with local individual premiums, subsidies, networks and employee tax costs; a national percentage cannot determine which is better for this team.
5. Clean up past periods Ask your CPA whether you owe Form 8928 for past periods of premium reimbursement and whether reasonable-cause relief applies.

Why stipends disappoint

In the hypothetical paycheck calculation above, $500 produces $326.75 after the stated withholding. A different worker or withholding method produces a different result. Compare the stipend with actual available coverage and subsidies before deciding that a group plan or reimbursement arrangement is better. I would make the benefit understandable first, then assess the net cost to both employer and employee.

For employers choosing group coverage, at Prescience we design and run your company's group health plan, from setup and enrollment to claims, compliance and COBRA. What your team gets:

• An effective $0 deductible, so the plan helps from the first visit.
• Simple copays shown before a visit, capped by a low out-of-pocket maximum.
• A broad national PPO network, plus providers we contract with directly.
• 24/7 physician-led care navigation: a care team that finds the right provider, books appointments and explains costs up front.

What your company gets: one monthly cost set in your quote, usually 10–20% below comparable fully insured coverage and fixed before the plan starts, with no admin fees. You keep your payroll provider, and the plan can start mid-year.