Taxation of Employer-Sponsored Health Insurance: An Overview of All Models
- If the employer pays the premiums directly to the insurer, the supplementary health insurance is considered a benefit in kind and is exempt from taxes and social security contributions up to 50 euros per month per employee.
- The 50 euros is a threshold, not a tax-free allowance: If it is exceeded, the entire amount is taxable, not just the amount exceeding the threshold.
- All non-cash benefits for a given month are added together; it’s not just the supplementary health insurance. If one benefit is taxed at a flat rate, other benefits can benefit from the tax-free allowance.
- Above the exemption threshold, there are four options to choose from, which differ significantly in terms of cost, social security obligations, and impact on employees.
- A subsidy for a policy you have taken out yourself is not a benefit in kind but rather cash wages, and is therefore fully subject to income tax and social security contributions.
Who Pays for Supplementary Health Insurance? Three Funding Models
Whoever pays for the employer-sponsored health insurance determines its coverage and its tax treatment. Across the market and regardless of the insurer, there are three models to choose from, which can also be combined.
Employer-Funded
The employer covers the full cost of the contribution, usually as a fixed amount per employee. As a non-cash benefit, amounts up to 50 euros per month are exempt from taxes and social security contributions, with no additional costs to employees. This is the most significant benefit, relevant to the entire workforce.
Employee-Funded
Through a collective bargaining agreement, the employer only provides access; employees pay the premiums themselves. Favorable group rates, no waiting period, and no medical exam or a simplified one. It costs the employer nothing, but is less widely recognized.
Blended financing
Employers and employees split the premium according to a fixed ratio. A common arrangement is an employer-funded base plan supplemented by employee-funded coverage at company rates, often without a medical exam during the first few months.
Wages in Kind or Cash Wages: Setting the Course
Supplementary health insurance (bKV) can only be considered a benefit in kind if you, as the employer, pay the premiums for your employees.
A non-cash benefit exists when your employees receive only insurance coverage and no cash payment is possible. The tax benefit applies only in this case.
Cash wages are considered earned as soon as a cash payment is possible. The amount is then fully subject to income tax and social security contributions.
This classification should be specified in the employment contract; however, it may also be agreed upon verbally outside the scope of the employment contract. In the absence of such an agreement, the bKV is considered cash wages.
Be careful with subsidies. If an employer pays a subsidy toward a policy that the employee has taken out on their own, this is considered cash compensation—fully subject to income tax and social security contributions, and the 50-euro exemption limit does not apply. For the payment to be treated as a benefit in kind, the employer must be the policyholder and pay the premium directly to the insurer.
The 50-euro exemption limit: tax- and contribution-free up to this amount
The prerequisite is that there is no option to choose cash instead of bKV.
The contribution is considered a monetary benefit
For tax purposes, the employer’s contribution to the supplementary health insurance (bKV) is considered a benefit in kind under Section 8(2), sentence 11, of the Income Tax Act (EStG). The exemption limit applies to all benefits in kind that employees receive in addition to their wages—in the form of goods, services, or designated-purpose vouchers instead of cash.
Up to 50 euros—completely tax- and contribution-free
As long as the limit is not exceeded, no income tax or social security contributions are withheld from the payment.
Exemption Threshold, Not Exemption Amount
The 50-euro limit applies to the total of all non-cash benefits received in a month, not to the supplementary health insurance (bKV) alone. If the limit is exceeded, the entire amount is subject to income tax and social security contributions—not just the amount exceeding the limit.
Planning Tip: If you receive multiple benefits at the same time, it may make sense to report the smaller monetary benefit for tax purposes using one of the options below and to use the 50-euro tax-free allowance on the larger benefit.
What happens if the non-cash compensation limit is exceeded?
Each of the four options addresses the same two questions: Who pays the tax, and is the contribution subject to social security contributions?
| Criterion | § 37b of the Income Tax Act (EStG) — a flat rate of approximately 30% | § 40(1) of the Income Tax Act (EStG) — flat rate, individual rate | Net Pay Taxation | Monetary benefit, such as salary |
|---|---|---|---|---|
| Here's how it works | The employer pays a flat rate of approximately 30% in income tax on the contribution; no application is required, and the funds are available immediately. | The employer also pays a lump sum, but at an average rate calculated on an individual basis. An application must be filed with the tax office. | The employer pays the taxes and the entire social security contribution, including the employees' share. | The contribution is treated as a regular part of the salary; employees are responsible for paying their own taxes and their share of the contribution. |
| Advantages | Available immediately, no application required, fixed and predictable rate, up to 10,000 euros per person, also available to non-employees. | In addition, it is exempt from social security contributions and is therefore usually the most affordable flat-rate option. | Fully net pay for employees—the strongest sign of appreciation. | Most cost-effective for the employer: only the employer's statutory contribution, no special procedures. |
| Disadvantages | The contribution remains subject to social security contributions for both the employer and the employee. | Application required; rate is set annually; maximum of 1,000 euros per person; only for the company’s own employees; recommended for companies with 20 or more employees. | Most expensive option; the largest cost component for the employer. | It reduces employees' take-home pay and shows a lack of appreciation. |
| Applies when | Rapid implementation or implementation during the fiscal year, a small number of cases, high tax rates, or contributions exceeding 1,000 euros per year. | Workforces of 20 or more employees, contributions of up to 1,000 euros per year, with a focus on social security savings. | We’d like the best possible service, and we have the budget for it. | A streamlined, cost-effective solution. |
bKV as a Business Expense
Insurance premiums and, if applicable, taxes and social security contributions paid by the employer may be deducted as business expenses, thereby reducing taxable income. The 50-euro exemption limit does not apply to the deduction of business expenses.
Your Duty to Provide Information as an Employer
You are required to notify your employees in writing that taxes have been withheld. An email is sufficient; a signature is not required.
Frequently Asked Questions About the Taxation of Supplementary Health Insurance (bKV)
If the employer pays the premiums directly to the insurer, the supplementary health insurance is considered a benefit in kind and is exempt from taxes and social security contributions up to 50 euros per month per employee.
In that case, the entire amount is subject to income tax and social security contributions, not just the portion exceeding the limit. This is a threshold, not a tax-free allowance.
Yes. The 50 euros applies to the total of all non-cash benefits for a given month, not to the supplementary health insurance alone.
That may be true, but a subsidy for a policy you’ve taken out yourself is considered cash wages and is fully subject to income tax and social security contributions. The 50-euro exemption limit does not apply.
No. It can be used immediately without having to submit an application, at a fixed rate of about 30 percent and up to 10,000 euros per person.
Based on experience, this applies to companies with 20 or more employees. This option is also exempt from social security contributions and is therefore usually the most cost-effective flat-rate option.
Yes. Insurance premiums and, if applicable, the taxes and social security contributions paid by the employer are deductible and reduce taxable income.
Yes. Employers are required to notify employees in writing of the taxes that have been withheld. An email is sufficient.
As of July 30, 2026. This article provides a general overview and is not a substitute for tax advice in specific cases. The relevant provisions are Section 8(2), Sentence 11, Section 37b, and Section 40(1) of the German Income Tax Act (EStG), as amended.
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