Benefit Allowance: Definition, Purposes, and Types

What Is a Benefit Allowance?

A benefit allowance is money that a company or government agency provides to an employee for a specific purpose, such as transportation, healthcare costs, or a flexible spending account. Benefit allowances administered to employees can be distributed through regular payroll.

How Benefit Allowance Works

Employers can use a benefit allowance to give employees flexibility in creating a benefits package that best meets their needs. Rather than imposing a particular healthcare plan on all employees, for example, the employer could offer a base plan plus a benefit allowance.

Employers might establish a benefit allowance that also includes coverage for wellness programs, such as gym memberships, that contribute to the overall health of the employee. The employee could use the benefit allowance toward supplemental benefits such as dental insurance or coverage for dependents.

Employers could also allow their employees to put a benefit allowance toward life insurance, disability insurance, vision care, or any number of other benefits. Employees thus receive customized benefits and employers can offer a competitive benefits package that will help them recruit and retain top talent.

Ways Benefit Allowances Are Structured

Small businesses that may not have the resources to offer health insurance and other benefit plans to their employees might use a benefit allowance as an option to create access to coverage to their workers.

Benefit allowances can be offered in a variety of ways. Employers can create taxable stipends, by giving employees taxable raises. This gives the employee a fixed stipend for health insurance purchases. The employee will receive the money regardless if they use it toward health insurance procurement. Typically, the employee will receive a form detailing how much of the stipend should be reported as income with their tax return.

Companies can also offer a tax-free reimbursement plan to provide a benefit allowance. Under this option, the employee receives would receive a fixed amount to put toward health insurance; however, the funds are only disbursed if the insurance is purchased. In order to receive the allowance, the employee must submit proof that they have purchased a health insurance policy for themselves. The reimbursements are then granted to them on a tax-free basis.

Special Considerations

Along with the benefit allowance, an employer might designate a party to serve as a health insurance broker to help employees pick a plan.

Some employers in the past may have paid benefit allowances for health insurance to employees without a formal plan in place, but such practices were not in line with the reforms inherent in the Affordable Care Act.