Many small businesses want to help employees with healthcare costs—but traditional group health insurance can be expensive. The good news? There are ways to offer health-related benefits without sponsoring a full insurance plan. Here are three common options, from simplest to most tax-efficient.
Option 1: Pay a Cash Stipend
The simplest approach is to give employees extra cash through payroll.
Pros
• Extremely easy to administer
• No special plans or third-party providers
Cons
• Fully taxable to both the employer and employee
• Subject to payroll taxes
• Employees lose a portion of the benefit to taxes
Option 2: HRA (Health Reimbursement Arrangement)
You choose a set amount (e.g., $500/month) and reimburse employees for qualified medical expenses.
Pros
• Tax-free for both employer and employee
• Very flexible—can cover premiums, deductibles, prescriptions, and more
• Often employees can purchase traditional insurance directly through the plan
• Allows employers to control costs with defined monthly limits
Cons
• More complex to set up
• Requires a third-party administrator (i.e. additional fees)
• To be eligible employees must either already have insurance or use the HRA to buy it
• Often “use it or lose it,” depending on plan design
Option 3: FSA (Flexible Spending Account)
The classic “use it or lose it” fund.
Employees elect a yearly amount that comes out of their paycheck pre-tax.
Pros
• Reduces taxable income for employees
• Payroll-tax savings for both sides
• Covers medical, dental, vision—and even some OTC items
• Can also be used for dependent care
Cons
• Funds generally must be used within the year
• Less flexible for unpredictable expenses
There’s no one size fits all. The best option depends on your team, cash flow, and how much administrative complexity you’re willing to take on. But regardless of the route you choose, make sure health expenses are being covered in a tax-advantaged way.
