Employer contribution

The employer contribution forms the financial basis of every company health insurance plan: it refers to the amount the employer contributes toward the insurance premium. In practice, this is usually the entire premium—the employee contributes nothing. This full employer financing is the dominant model not only for tax reasons but also the main reason why employees perceive company health insurance as a genuine benefit rather than a special offer from insurance companies.

An overview of the three financing models

There are three fundamentally different funding models in supplementary health insurance, which differ significantly in terms of cost, tax treatment, and employee acceptance:

• Fully employer-funded (standard case): The employer covers 100 percent of the premium. There is no cost to employees. This is the standard in approximately 90 percent of all group supplementary health insurance policies.
• Employer-funded with a top-up option: The employer covers the cost of a basic plan; employees can choose a higher coverage limit or additional coverage options at their own expense. The top-up is covered under the same policy, and the employee’s share is deducted from their salary as a net amount.
• Fully employee-funded (group rates): The employer negotiates the terms but does not contribute financially; employees pay the costs themselves. This model is less attractive from a tax perspective and has become significantly less common in recent years.

Choosing one of the three models has far-reaching consequences—not only in terms of budget, but also in terms of usage rates, acceptance, and administrative burden.

Why full financing is the norm

There are three reasons to opt for full employer funding. First: the tax advantages. The €50 limit on non-cash benefits under Section 8(2) of the German Income Tax Act (EStG) and the option for lump-sum taxation under Section 37b of the EStG require that the employer cover the premium. As soon as the employee pays the premium themselves, the tax exemption applies only to a limited extent or not at all.

Second: The negotiating position vis-à-vis the insurer. With plans fully funded by the employer, the insurer waives medical underwriting and waiting periods because the size of the pool and guaranteed enrollment sufficiently spread the risk. With hybrid models or plans where the employee pays the full premium, the terms and conditions become significantly stricter, or the insurer requires medical underwriting.

Third: Employee perception. A benefit that employees pay for themselves is not perceived as a benefit but as a group offering—resulting in correspondingly low usage rates. Companies that switch between fully subsidized plans and cost-sharing models typically report a 30 to 50 percent drop in usage rates.

Amount and Grading of the Employer Contribution

The amount of the subsidy depends on the selected rate tier. Standard rates range from 10 to 50 euros per month per employee, which corresponds to an annual budget of 300 to 1,200 euros. Some employers structure the subsidy on a sliding scale:

• Based on length of service: €300 annual budget starting from the first day, €600 starting from the third year, and €900 starting from the fifth year. This helps foster long-term employee loyalty.
• By hierarchical level: administrative staff €300, skilled workers €600, managers €900. This is legally permissible, but must be objectively justifiable—otherwise, it could lead to disputes under the General Equal Treatment Act (AGG).
• By family status: Employees with children receive a higher budget. This is legally problematic because family status is not a permissible criterion for differentiation. A better approach: a family option that includes coverage for dependents.

All three options are legally permissible provided that the distinction is based on objective, factual criteria and is transparently documented in the pension plan.

Regulations on Care and Equal Treatment

An employer who implements a supplementary health insurance plan for only a portion of the workforce must provide an objective justification for this selection and document it in writing. This is typically done in a benefit plan—a document that defines which employee groups are eligible for the supplementary health insurance and under what conditions. Without a clear benefit plan, there is a risk that individual employees could sue to be included in the supplementary health insurance, citing the principle of equal treatment under labor law.

FAKTOR MENSCH : When introducing a supplementary health insurance plan, we generally recommend full employer funding—not primarily for tax reasons, but for communication purposes. We have seen projects where companies opted for a hybrid model with a €20 monthly employee contribution to signal “appreciation through employee participation.” The result in every case was the same: declining participation rates, lower utilization, and in the annual employee survey, the benefit was perceived more as a pay cut than as a benefit. Full funding isn’t generosity—it’s operational efficiency.

Tax Treatment of the Grant

The employer’s contribution to the supplementary health insurance plan qualifies for tax benefits in two ways. Up to the monthly non-cash benefit limit of 50 euros, the contribution for employees is exempt from taxes and social security contributions, provided that no other non-cash benefits have already reached this limit. If the contribution exceeds this amount, the employer can tax the premium at a flat rate of 30 percent under Section 37b of the German Income Tax Act (EStG)—the benefit remains net-neutral for employees.

For the employer, the full amount of the premium contributions is tax-deductible as a business expense. This means that a monthly subsidy of 50 euros per employee costs the company approximately 33 euros net after taxes—a financial advantage that is two to three times greater than traditional gross wage increases.

Conclusion

The employer contribution to supplementary health insurance, in its standard form—full coverage of the premium—is the most cost-effective and operationally simplest model. Variations from this are possible, but they rarely offer the same tax, administrative, and communication advantages as full funding. When introducing a supplementary health insurance plan, the subsidy amount should be based not on gut feeling but on strategic goals: Those aiming to retain skilled workers and enhance visibility should opt for higher budgets with lump-sum taxation; those aiming for broad basic coverage should stay under 50 euros to remain within the non-cash benefit limit.