A friendly reminder: Please note that we are not licensed tax professionals. Our mission is to empower small business owners and entrepreneurs to make smart decisions when it comes to health insurance.
One of the questions we receive most from employers and employees is how QSEHRA (small business HRA) affects premium tax credits for plans purchased through the marketplace.
In general, small business HRAs will reduce employees premium tax credits dollar for dollar. Basically the employee will be exchanging the tax benefit from the government with the tax benefit from the employer. The employee may still access their tax credits if the benefit is less than the premium tax credit (PTC) available to them.
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.
1. Determine if small business HRA monthly allowance qualifies as affordable coverage:
- The employee must determine if the premium for self-only coverage through the second-lowest-cost silver plan offered on their local exchange minus the QSEHRA monthly allowance is less than 9.69% of their household income for the month.
- For example, if the monthly allowance is $400 per month and the exchange premium is $600, then if $600 - $400 = $200 is less than or equal to 9.69% of the employee's monthly income, the allowance makes this coverage affordable and the employee doesn't qualify for a premium tax credit that month.
2. Adjust the amount of the tax credit to reflect QSEHRA monthly allowance:
- For example, if the employee is eligible for a $400 premium tax credit but receives $300 allowance from their small business HRA, they would be able to use only $100 of the tax credit.
- The tax credit can be reduced to zero, but it can't go below zero.
- The employee should request the adjusted tax credit from the exchange when purchasing their insurance policy.
Steps employees must take
It is very important that employees purchasing a plan through the marketplace and receiving a premium tax credit notify their insurance provider immediately about their small business HRA benefit. The insurance provider will recalculate the employee tax credit with the small business HRA benefit. Failure to report the small business HRA to your insurer will result in having to pay back the tax credits to the IRS during tax time.
Beginning with the 2017 tax year, employees will need to report the QSEHRA benefit on their taxes on IRS Form 8962. The benefit is reported on all employee W-2’s regardless if they have received any reimbursement during the year; Therefore, we do not recommend employees opt-out of QSEHRA in attempt to keep the PTC.
Again, we are not licensed tax professionals so please consult with one before making any decisions for your company.