§ 37b of the Income Tax Act (Flat-Rate Taxation)

If the contribution to the supplementary health insurance plan exceeds the 50-euro exemption limit, flat-rate taxation under Section 37b(2) of the Income Tax Act (EStG) is the quickest of the four options to implement. The employer pays the income tax on a flat-rate basis, at a fixed rate and without any application process. For employees, this does not change anything with regard to income tax—but it does affect social security contributions, and that is precisely where the catch lies.

How the load is composed

The flat rate is 30 percent of the donation. Added to this are the solidarity surcharge on the flat-rate tax and the flat-rate church tax, the rate of which varies by federal state. Mathematically, this results in an effective tax burden of about one-third of the donation.

Here's an example based on a monthly premium of 60 euros, or 720 euros per year:

• Flat tax of 30 percent on 720 euros
• plus the solidarity surcharge on this tax amount
• plus a flat-rate church tax on this tax amount
• plus the employer's share of social security contributions on the 720 euros

The specific amounts and the question of exactly what the basis for calculation is based on should be coordinated with payroll accounting—for example, whether a service fee for contract management is part of the allowance or constitutes a purely employer-provided benefit.

The big advantage: ready to use right away

No application to the tax office is required. This option can therefore be implemented during the year and on short notice—for example, if a supplementary health insurance plan is scheduled to start at the beginning of a quarter and there isn’t enough lead time for an application process, or if an existing benefit unexpectedly reaches the exemption limit and a solution is needed quickly.

The rate is fixed and can be planned for the entire term. This is a real difference from the flat-rate method under Section 40(1) of the Income Tax Act (EStG), for which the average rate is recalculated annually and whose trend changes in line with the company’s salary structure.

Broad Scope of Application

The maximum amount is 10,000 euros per recipient per year—significantly higher than what is typically covered under the bKV. Even at higher budget levels, this limit is practically never the determining factor.

Unlike § 40(1) of the Income Tax Act (EStG), this option is also not limited to the company’s own employees. If, for example, freelancers or business partners are to be included, § 37b of the Income Tax Act (EStG) is often the only viable option.

The main drawback: Social Security remains

The flat-rate taxation under Section 37b of the Income Tax Act (EStG) does not exempt employees from social security contributions. The contribution remains subject to social security taxes for both the employer and the employee.

In terms of cost accounting, this means that the flat-rate tax and the employer’s share of social security contributions are added to the contribution. For employees, their own share reduces their take-home pay—so the benefit is not received in full, a fact that requires explanation when communicating with the workforce.

This is precisely where the difference lies compared to the lump-sum allowance under Section 40(1) of the Income Tax Act (EStG), which is also exempt from social security contributions. For larger workforces, this difference adds up to a significant amount.

A point that is often overlooked

The option to use the flat-rate method under Section 37b of the Income Tax Act (EStG) cannot be divided arbitrarily. Anyone who chooses the option for the supplementary health insurance (bKV) should clarify what impact this will have on other benefits during the same period. This question should be addressed before the decision is made, not in the first pay stub—it can affect the total calculation if the company provides other in-kind benefits.

When This Option Is Appropriate

• Rapid implementation or implementation during the fiscal year without a lead time for an application process
• Smaller workforces for which the effort involved in filing an application is not worth it
• Annual contributions exceeding 1,000 euros per person, where Section 40(1) of the Income Tax Act (EStG) reaches its maximum limit
• Payments to Individuals Who Are Not the Employer's Own Employees
• When planning certainty based on a fixed rate is more important than the latest cost optimization

Conclusion

Section 37b of the Income Tax Act (EStG) is the pragmatic option: immediately applicable, predictable, requiring no administrative lead time, and with broad scope of application. The trade-off is that social security contributions remain mandatory for both parties. For companies with a certain number of employees and annual contributions under 1,000 euros, the flat-rate method under § 40(1) of the German Income Tax Act (EStG) is generally the more cost-effective option—but if you need to get started quickly or exceed that threshold, § 37b is the better choice.

This article provides a general overview and is not a substitute for tax advice in specific cases. Section 37b of the German Income Tax Act (EStG), as amended, applies.