If you’re considering a health reimbursement arrangement (HRA) for your business, something to consider is how the HRA interacts with the premium tax credit (PTC) of your employees. Today, let’s look at how the individual coverage HRA, or ICHRA, and premium tax credits work.
First, a refresher: What is a Premium Tax Credit?
Premium tax credits (PTCs) 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 ICHRA. Employees will be required to give notice to the Exchange of their ICHRA offering.
Calculating Premium Tax Credits
Premium tax credits are based on income and insurance affordability. The IRS has set guidelines for determining eligibility for the premium tax credit and the size of the tax credit.
If an ICHRA is deemed affordable, employees must choose their HRA over a premium tax credit.
A nice feature of ICHRA is that if an ICHRA is deemed unaffordable, employees have the option to participate in ICHRA or opt-out annually. This is different than the QSEHRA, which does not allow employees to opt-out.
If the employee accepts the ICHRA they cannot claim any premium tax credits for the year for either themselves or any family members.
If the employee opts-out of the ICHRA for the year they may be able to claim premium tax credits, if they are eligible in the first place.
The next step is to determine whether 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.
Let’s take a closer look at ICHRA affordability.
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 9.83% for 2021.
- What is the lowest cost silver plan?
The lowest cost silver plan in a certain area is determined by the employee’s primary residence.
- How is employee household income 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 Level, then the plan is affordable.
“Affordability” and premium tax credits
Large employers have to offer “affordable” ICHRAs if they want to satisfy the corporate mandate, but what about small employers (typically under 50 employees) not subject to the mandate?
Affordability is still important for small employers because it impacts the ability for employees to secure premium tax credits (PTC) (aka Obamacare subsidies) to help pay for their premiums:
- If an ICHRA is “affordable”, employees are not eligible for tax credits (PTC)
- If an ICHRA is “unaffordable”, employees can choose either the ICHRA or tax credits (PTC)
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