Flat-rate taxation

Flat-rate taxation is the tax mechanism that keeps supplementary health insurance economically attractive even when premiums exceed the 50-euro limit for non-cash benefits. Regulated under Section 37b of the Income Tax Act, it allows employers to tax certain non-cash benefits provided to employees at a flat rate of 30 percent plus the solidarity surcharge and church tax—rather than treating the benefit as wages for the employee on an individual basis. For the employee, the benefit thus remains net-neutral, while the employer bears the tax burden.

Legal Basis and Scope of Application

Section 37b of the Income Tax Act (EStG) was introduced to reduce the administrative burden associated with small non-cash benefits. The provision applies to gifts to employees, invitations to events, and—particularly relevant for supplementary health insurance—contributions to private health insurance, provided these are not already exempt from tax under the non-cash benefit exemption limit.

Specifically, this means that a supplementary health insurance plan with a monthly premium of 60 euros exceeds the 50-euro non-cash benefit limit by 10 euros. Without flat-rate taxation, the entire premium—that is, the full 60 euros, not just the 10-euro excess—would be treated as taxable income. The employee would pay approximately 40 percent income tax and 20 percent social security contributions on this €720 annual gross amount—a net deduction of about €430 per year, which effectively renders the supplementary health insurance plan worthless.

Under the flat-rate taxation system provided for in Section 37b, the employer instead pays 30 percent of 720 euros—that is, 216 euros in flat-rate tax—plus the solidarity surcharge and, if applicable, church tax, for a total tax burden of approximately 230 to 245 euros. The employee receives the full benefit on a net-neutral basis.

Cost-benefit analysis for employers

Flat-rate taxation costs the employer an additional 30 percent of the premium—but it also avoids the social security contributions that would be due if the payment were treated as regular wages. Overall, this results in the following breakdown for the employer under a 60-euro plan:

• Net premium: 720 euros per year
• Flat-rate tax (30 percent of 720 euros): 216 euros
• Solidarity surcharge (5.5 percent of the flat-rate tax): 12 euros
• Total employer costs: approximately 950 euros per year
• All amounts are tax-deductible as business expenses

By way of comparison: To provide the employee with the same net benefit through a traditional pay raise, the employer would have to pay out approximately 1,500 to 1,700 euros gross per year—including the employer’s share of social security contributions. The flat-rate tax scheme thus saves 40 to 50 percent compared to the pay raise alternative.

Distinction from § 40(2) of the Income Tax Act

In addition to § 37b, § 40(2) of the Income Tax Act (EStG) contains another flat-rate provision with rates that are sometimes more favorable for specific cases—such as 15 percent for recreational allowances, 25 percent for cafeteria meals, or certain health benefits. However, supplementary health insurance (bKV) typically does not fall under the provisions of Section 40(2). Deviations from Section 40(2) are possible in practice (for example, for certain preventive programs within the bKV), but they require a clear demarcation and should be clarified with a tax advisor.

Combination with the non-taxable limit for non-cash benefits

An important point that is often overlooked in practice: the flat-rate tax option and the non-taxable allowance for non-cash benefits can be combined, but they are not cumulative. If an employer chooses a supplementary health insurance plan with a monthly premium of 60 euros, they cannot treat the first 50 euros as tax-free and the remaining 10 euros as subject to flat-rate taxation—the choice is one or the other for the entire premium.

In practical terms, this means: Rates under 50 euros fall under the non-taxable allowance for non-cash benefits (tax-free for employees, no cost to the employer). Rates over 50 euros are subject to flat-rate taxation (tax-free for employees, the employer pays 30 percent). The threshold at 50 euros is therefore critical from an operational standpoint—a rate of 49.80 euros is significantly more economically attractive than one of 50.20 euros, even though the services are nearly identical.

Consequences under social security law

A common question during the introductory phase: Does flat-rate taxation also trigger an obligation to pay social security contributions? In most cases, the answer is no. According to Section 1(1)(14) of the Social Security Remuneration Ordinance, benefits in kind subject to flat-rate taxation are exempt from social security contributions. This applies to all traditional supplementary health insurance (bKV) structures. Neither the employer nor the employee is subject to social security contributions—an additional efficiency gain compared to regular wages.

Exceptions apply in the case of unusual arrangements (such as hidden profit distributions to managing partners) and should be reviewed by a tax advisor.

FAKTOR MENSCH : In our consulting practice, we find that many employers, out of uncertainty, prefer to stay within the €50 non-cash benefit limit—even when a €60 rate would be a much better fit in terms of the actual benefit. The reason: Flat-rate taxation seems more complicated than it actually is. In practice, it’s a one-time decision in the payroll software—after that, taxation runs automatically, and the employer only notices it on the annual tax bill. Well-advised companies therefore not only review rates below 50 euros but also explicitly ask, “What does a 60- or 70-euro rate cost us in lump-sum taxation, and what do our employees get in return?” In the majority of cases, the additional benefit justifies the additional tax.

Practical Implementation in Payroll Processing

The flat-rate tax is not shown monthly on the employee’s pay stub but is processed through a separate pay code: “Flat-rate taxable non-monetary benefit under Section 37b of the German Income Tax Act (EStG).” Payroll must set up this pay code once, after which the processing occurs automatically. Important: The employee does not receive a payroll tax statement for this amount because, formally, it is not considered part of their wages. This should be mentioned in the introductory communication—otherwise, it may cause confusion during the annual tax filing.

Conclusion

The flat-rate taxation under Section 37b of the German Income Tax Act (EStG) is the tax mechanism that allows the supplementary health insurance plan to remain financially attractive even for plans exceeding the non-taxable limit for non-cash benefits. It is what distinguishes a supplementary health insurance plan that caps at 50 euros from one that scales with the needs of the workforce. When applied correctly, it is administratively straightforward, exempt from social security contributions, and tax-efficient—provided that payroll is set up correctly from the outset.