Health vs. wellness stipends

To attract and retain employees, you need to offer a competitive compensation package that meets their unique needs. Employee stipends, a type of taxable fringe benefit, provide a fixed sum of money from employers to help cover various costs.

You can offer this personalized benefit to cover any expense. But using stipends to cover health and wellness expenses is a popular practice for many employers. While both health and wellness stipends support your employees' well-being, you can use them to cover very different expenses.

In this article, we'll explore the differences between health and wellness stipends. We’ll also explain when a health reimbursement arrangement (HRA) might be a better tax-free option.

In this blog post, you'll learn the following:

• Valuable strategies to showcase your dedication to employee health and wellness.
• The different expenses you can cover with health and wellness stipends.
• How HRAs combine the benefits of health and wellness stipends.

Why are personalized employee benefits important?

If you want to see high job satisfaction among your employees, you need to offer them the benefits they want most. PeopleKeep's 2024 Employee Benefits Survey found that 92% of employees consider health benefits important, making them the most sought-after perk you can offer.

These days, more people are prioritizing healthy lifestyles. Another 80% of survey respondents agree that mental health and/or wellness benefits are important. From regular exercise and better eating habits to alternative therapies and counseling sessions, they want to improve every aspect of their mental and physical health.

However, traditional group health insurance often falls short of covering holistic well-being. For that reason, employers need to look at other health benefit options that appeal to today's job seekers. Otherwise, they may be drawn to look for better opportunities elsewhere. Our survey also found that 81% of employees said an employer's benefits package is an important factor in whether they accept a job.

What is an employee health stipend?

A health stipend is a sum of money employers offer to employees for their medical expenses and out-of-pocket healthcare costs. The flexibility health stipends offer allows your employees to purchase their own individual health insurance, use it for purely out-of-pocket health expenses, or a combination of the two.

You can also offer a health stipend in addition to other health benefits, giving your employees an added perk alongside your group health insurance plan or HRA.

Here are some examples of what your employees can purchase with a health stipend:

• Vision insurance premiums
• Dental insurance premiums
• Prescriptions
• Medical services, including office visits and co-pays
• Chiropractic care
• Out-of-pocket medical expenses
• Mental health costs
• Any other expenses

What is an employee wellness stipend?

Like a health stipend, a wellness stipend is a taxable benefit paid to employees to help them cover their wellness expenses. They're sometimes known as wellness spending accounts, wellness LSAs, wellness allowances, or wellness perks.

Employees mostly use these flexible benefits for physical and mental wellness needs other than medical expenses (which health stipends cover). However, employees can use them for some of the same expenses.

Employers generally provide wellness stipends to cover a range of activities and programs that promote healthier lifestyles.

Your employees can use this stipend on a wide variety of wellness expenses, including:

• Mobile apps
  • Fitness and motivation programs
  • Mental health apps
  • Meditation programs
  • Sleep tracking
• Fitness and motivation programs
• Meditation programs
• Sleep tracking
• Gym memberships
• Fitness classes
• Wearable fitness trackers
• Home exercise equipment
• Healthy meal delivery services
• Any other items or services they choose, such as personal trainers or wellness products

Pros and cons of employee stipends

Employee health and wellness stipends are a great way to show your workers you care about their happiness and overall well-being. But, you need to consider the pros and cons of these benefits before you add them to your compensation package.

Advantages of health and wellness stipends:

• They give employees more freedom to use their allowances on the medical costs they need.
• Since stipends are taxable, you can still offer them to your employees who receive premium tax credits without them having to waive their credits. You can also offer a stipend to international workers and 1099 contractors.

Disadvantages of health and wellness stipends:

• Stipends count as taxable income for the employer and the employee.
• Health stipends don't replace health insurance for employers with at least 50 full-time equivalent employees (FTEs). That’s because a stipend doesn’t satisfy the Affordable Care Act’s employer mandate. Instead, you can offer an individual coverage HRA (ICHRA) to satisfy the mandate.
• You can't ask employees for proof of insurance or receipts for employees' medical expenses that the IRS lists in IRS Publication 502 with a stipend. You can require receipts for items not listed as eligible in the IRS Publication.
• You can't require employees to purchase health insurance with the funds from your health stipend.

The ideal choice: A stand-alone health reimbursement arrangement (HRA)

While stipends serve their purpose for specific expenses or employees with premium tax credits, an HRA can offer several more advantages.

An HRA is an employer-funded health benefit. It's an excellent alternative to a traditional group health insurance plan, which can often be too expensive or rigid for small employers to provide. With an HRA, you offer your employees a tax-free monthly allowance. They then request reimbursement for their medical care and eligible services.

You can reimburse your team for more than 200 types of eligible expenses. This includes several focused on health and wellness, such as:

• Individual insurance premiums for health, vision, and dental plans
• Preventive care
• Prescription drugs
• Over-the-counter medication
• Acupuncture
• Alternative dietary supplements
• Alternative healers
• Chiropractic care
• Dietitian/nutrition services
• Herbal or homeopathic medicines
• Mental health counseling

*Some holistic health services require a doctor’s note to prove they’re medically necessary.

While HRAs offer incredible flexibility, you can only reimburse what the IRS considers eligible expenses. But, suppose you want to give your employees more leeway with their spending. In that case, you can always offer a stipend alongside an HRA as an additional perk. For example, if you offer an employee wellness stipend with an HRA, you can also give employees an allowance for the cost of yoga classes, fitness memberships, and personal trainers. All while you still reimburse employees tax-free for their eligible medical expenses through an HRA. Leveraging both of these benefit options together demonstrates an even deeper commitment to employee health and wellness.

When combining HRAs and stipends, it's essential to clearly communicate the differences between the two benefits to avoid confusion. For example, employees should understand that HRA reimbursements are tax-free, while stipends are taxable income.

Health stipends vs. wellness stipends vs. stand-alone HRAs

Conclusion

Knowing the differences between health and wellness stipends can help you make the right choice for your business and your employees. However, an HRA can offer greater value for your investment while ensuring your employees receive comprehensive health coverage. If you're set on stipends, offering one alongside an HRA can lead to better results.

Do you want to offer your employees a health benefit without the hassle of going about it yourself? Thankfully, with PeopleKeep's personalized health benefits solutions, you can. Our health stipend and HRA administration platforms allow you to provide health benefits to your employees in minutes. Contact us today to learn whether a stipend or HRA is right for your organization.

This blog article was originally published on March 2, 2022. It was last updated on December 19, 2024.