Non-cash compensation

Whether the supplementary health insurance (bKV) qualifies for tax benefits depends on a single question: Does the employee receive only insurance coverage—or could they receive cash instead? In the first case, it is considered compensation in kind; in the second, it is cash compensation. Only compensation in kind falls under the 50-euro exemption limit.

The Three Requirements for Non-Cash Wages

For the employer's contribution to the supplementary health insurance (bKV) to be considered non-cash compensation, three conditions must be met:

• The employer is the policyholder. The policy is in the employer's name, not the employees'.
• The premium goes directly to the insurer. There is no detour through the payroll account, and no reimbursement based on proof of payment.
• There is no right to choose a cash payment. Employees cannot demand to receive the equivalent amount in cash.

If any one of these conditions ceases to apply, the classification changes—and with it, the entire tax system.

Why this distinction involves so much money

The difference is not gradual, but fundamental. When provided as a non-cash benefit within the exemption limit, the supplementary health insurance plan costs the employer exactly the premium amount—no tax, no social security contributions, and no entry on the pay stub. When provided as cash wages, income tax and social security contributions are added on both sides, and the employee receives significantly less net pay than the employer pays out.

With a workforce of 100 people and a monthly contribution in the mid-double digits, that’s the difference between a predictable expense and a noticeable additional cost—even though the benefits for employees remain the same.

The most common mistake: the grant model

In practice, cash wages are almost always structured the same way. The employee either already has supplemental insurance or takes out a policy, and the employer contributes a monthly amount. From a financial perspective, this looks like a bKV—but for tax purposes, it is a cash payment to the employee.

The earmarking of the funds does not change this. Whether the grant is expressly intended for insurance and whether proof of its use is provided is irrelevant to its classification.

What’s particularly problematic is that this error cannot be corrected retroactively. Once a plan has been set up as a subsidized model, it is no longer possible to retroactively grant the benefit—not even by switching to a collective agreement at a later date. Therefore, this review must take place at the very beginning of the implementation process.

Other scenarios that result in cash pay

• Employees can choose between supplementary health insurance and a pay raise
• Insurance coverage can be surrendered in exchange for a lump-sum payment
• Upon termination, a remaining balance is paid out instead of the contract being terminated
• There is no contractual provision governing classification

Contractual Protection

This classification should be explicitly stipulated—either in the benefits policy or in the employment contract. In the absence of such an agreement, cash payment is the obvious outcome, because it cannot then be proven that a claim to payment was excluded.

The effort required is minimal, but the impact is significant: A clearly worded benefit plan is the document that determines classification in the event of an audit.

The Path to Non-Cash Compensation

In practice, it is arranged through a collective bargaining agreement: The employer enters into the agreement with the insurer, and the employees are insured under it. This automatically fulfills all three requirements and also provides more favorable group rates, the elimination or shortening of waiting periods, and, in many cases, a simplified medical examination or no medical examination at all.

Conclusion

Whether to pay in kind or in cash is not a matter to be addressed later in the payroll process, but rather a decision that must be made when drafting the contract. It determines whether the 50-euro exemption limit applies at all—and thus affects the entire cost calculation for the supplementary health insurance (bKV). Once this decision is made incorrectly, it can only be corrected for the future.

This article provides a general overview and is not a substitute for tax advice in specific cases.