Rising health insurance costs are prompting many employers to shift from traditional group plans to personalized benefits. Health reimbursements help employers control costs while giving employees flexibility to choose coverage that works for them.
In this article, we'll explain the tax differences between two popular reimbursement options: health reimbursement arrangements (HRAs) and health stipends.
In this blog post, you'll learn:
No. HRA reimbursements are not taxable to employees or employers, as long as the arrangement complies with Internal Revenue Service (IRS) regulations1 and employees maintain qualifying coverage, depending on the type of HRA. For a qualified small employer HRA (QSEHRA), employees must maintain minimum essential coverage (MEC). For an individual coverage HRA (ICHRA), employees must maintain individual health insurance with MEC to be eligible for the benefit.
When properly structured, an HRA lets employers reimburse qualified medical expenses, including health insurance premiums, without triggering federal income or payroll taxes.
That means:
However, these tax advantages only apply if the HRA is set up and administered according to IRS rules and ERISA. This includes maintaining formal plan documents and limiting reimbursements to eligible medical expenses.
A QSEHRA is sometimes taxable to employees if an employer mistakenly reimburses them for medical expenses when they don’t have MEC2. A QSEHRA may also reimburse employees on a taxable basis for a spouse’s employer-sponsored group plan premiums if those premiums were already paid pre-tax through payroll. This is known as employer-sponsored premium reimbursement (ESPR).
The IRS has clear rules governing how different types of HRAs work and how employers must set them up to comply.
For eligible taxpayers to receive benefits, an HRA must meet the following requirements:
To maintain compliance, healthcare reimbursement plans must have formal plan documents that describe how the plan is managed, which medical expenses are reimbursable, and what documents are required to demonstrate compliance.
If an employer doesn't want to set up formal plan documents and procedures to receive these pre-tax benefits, they can just give employees a raise or a health insurance benefit stipend. However, the organization will pay payroll tax on these extra wages, and employees will pay payroll and income tax.
Eligible employees can purchase individual health insurance coverage from the federal or state marketplace with an HRA. Employees pay for their own medical care and premium costs upfront and request reimbursement for them.
According to IRS Publication 502 and the CARES Act, expenses eligible for reimbursement3 include:
Business owners set monthly allowance caps for reimbursement and design their plans to reflect which expenses they want to be eligible for reimbursement, such as healthcare premiums only or all eligible expenses.
Once employees submit proof of their medical bills and other qualifying expenses, employers can reimburse them up to their available allowance.
This makes an HRA a flexible and cost-effective coverage option, especially if you have employees with chronic conditions or who require frequent medical care.
Two of the most popular stand-alone HRAs are:
HRAs aren't the only option for giving employees contributions for their medical expenses. There are also employee stipends.
Unlike an HRA, the IRS considers healthcare stipends taxable income. That's because stipends aren't a formal employer-sponsored health insurance plan and don't have as many regulations for qualified employee expenses. Similar to bonuses, stipends aren't tax-advantaged and count as taxable wages earned by the employee. Additionally, there are no employer contribution limits with stipends.
When employers provide funds for out-of-pocket expenses or medical insurance coverage premiums using a stipend, they pay payroll tax on those funds. Stipends count as taxable wages. Employers must withhold and pay payroll taxes (Social Security and Medicare), and employees pay income and payroll taxes on the amount.
Because the ACA prohibits employer payment plans (EPPs), you can't require your employees to use their stipend on a health insurance plan. You also can't ask your employees to submit proof of insurance or receipts for any items listed in Internal Revenue Code (IRC) § 213(d).
A stipend also doesn't satisfy the ACA's employer mandate for organizations with 50 or more FTEs. That means larger organizations should offer a group health plan or an ICHRA to comply with the law.
Stipends have fewer regulations associated with them, making them a simple benefits solution for small organizations.
Your employees don't need medical insurance to participate in a stipend. This allows for stipends to cover an array of healthcare expenses for employees, no matter if they have an existing insurance policy, a health savings account (HSA), or flexible spending accounts (FSAs).
It also allows your employees who participate in premium tax credits to take advantage of these benefits without necessarilyhaving to reduce or give up their premium tax credits. However, this will depend on their income.
For those who already have a group health plan or an HRA, taxable stipends can help employees with additional out-of-pocket medical expenses. They can provide additional financial support for employees with various medical bills for chronic conditions or who simply want more coverage to pay for doctor visits or over-the-counter medicine. However, they'll have to pay taxes on these extra allowances.
While both HRAs and health stipends give employees more flexibility than traditional group health plans, the key difference lies in tax treatment and compliance requirements.
Here’s how they compare:
|
HRA |
Health stipend |
|
|
Federal income tax |
Not taxable (if compliant) |
Taxable |
|
Employer payroll tax (FICA) |
No |
Yes (7.65%) |
|
Employee payroll tax |
No |
Yes (7.65%) |
|
Reported on Form W-2 |
No (not in Box 1 wages, though the QSEHRA requires tax-free W-2 reporting in Box 12 with code FF) |
Yes |
|
Requires MEC |
Yes |
No |
|
Satisfies the ACA employer mandate |
Yes (ICHRA) |
No |
With these differences in mind, let’s look at what happens if an employer wants an employee to receive $500 for healthcare.
To offer $500 after taxes with a stipend, an employer may need to spend $650 to $680, depending on:
To offer $500 with an HRA:
HRAs give employers a tax-free, flexible way to reimburse employees for healthcare expenses, while stipends provide a simpler but taxable alternative. Understanding the differences, including tax treatment, compliance requirements, and eligibility, helps organizations maximize benefits, control costs, and empower employees to pay for the medical care they need.
With PeopleKeep by Remodel Health, setting up a compliant HRA is quick and easy. Schedule a call with one of our HRA specialists today and take the first step toward a healthier, happier workforce!
This blog post is educational in nature and shouldn’t be taken as official tax advice.
This blog article was originally published on November 30, 2020. It was last updated on March 12, 2026.