* Updated June 20, 2019* One of the major factors when deciding whether or not to use a small business HRA (like QSEHRA or ICHRA) for your company is how the HRA interacts with the premium tax credit (PTC) of the employees.
For QSEHRAs, employers often find that their contributions are simply offsetting the PTCs their employees would receive anyway, dollar for dollar. In fact, almost 20% of employers who decided not to use QSEHRA cited the issue of PTCs as the reason. ICHRA, one of the new HRAs that will go into effect January 2020, will be a critical step in remedying that situation.
What is a Premium Tax Credit?
Premium tax credits are tax credits that help individuals and their families purchase health insurance coverage through the Exchange. The premium tax credit is not available to plans purchased outside of the Exchange. The credit is calculated from annual income and reduces the out of pocket expense for qualified individuals.
When individuals enroll in an Exchange plan, the Exchange will ask if the individual is offered any coverage through their employer. This includes coverage through the Individual Coverage HRA. Employees will be required to give notice to the Exchange of their ICHRA offering.
Individual Coverage HRAs and Premium Tax Credits
Employees can choose to participate in ICHRA or receive a PTC. They cannot do both.
A nice feature of ICHRA is that employees have the option to participate in ICHRA or opt-out annually. This is different then ICHRA's predecessor, QSEHRA, which does not allow employees to opt-out.
If the employee accepts the Individual Coverage HRA they cannot claim any premium tax credits for the year for either themselves or any family members.
If the employee opts-out of the Individual Coverage HRA for the year they may be able to claim premium tax credits. The Exchange will then determine if the ICHRA offered is deemed affordable or unaffordable for the employee. In cases where the employee has opted out of ICHRA and the HRA is considered unaffordable the employee is allowed to claim premium tax credits for themselves and dependents. In cases where the employee has opted out of ICHRA and the coverage is deemed affordable the employee may not claim any premium tax credits for themselves or dependents.
The Exchange website will provide individuals information on how to determine affordability for ICHRA which will be ready for the start of Open Enrollment on Nov 1, 2019.
How is affordability calculated?
ICHRA is considered affordable if the remaining amount an employee must pay for a self-only silver plan on the exchange does not exceed 1/12 of their household income.
What is the lowest cost silver plan? The lowest cost silver plan in a certain area is determined the employee’s primary residence.
How is employee household income is calculated? Determining the employee household income is based on information provided on Box 1 of the employee’s W-2 form. The rate of pay is determined with the assumption that the employee works at least 130 hours per month. Lastly, if it is affordable at the Federal Poverty Line, then the plan is affordable.
How Can Take Command Health Help?
Does this sound confusing, expensive or both? Don't worry. We are here to make your life easier. With our ICHRA administration tool (which we are so excited to launch!), set up will be a walk in the park. We'll handle all the accounting and legal legwork, take care of on-boarding each of your employees (or clients), and make tax time easy and painless. We are currently designing innovative tools that will make this process as simple and intuitive as possible.
Want to learn more? Check out our brand new ICHRA guide or chat with one of our HRA experts online. We'd be happy to help!