A common question is "will offering a Small Business HRA prevent employees from obtaining individual premium tax credits?" The answer is no, but adjustments must be made in how the credit is calculated.
Employees who receive monthly allowances through a Small Business Health Reimbursement Arrangement (HRA) can still access premium tax credits because an HRA is not an "eligible employer-sponsored plan."
However, federal law requires the premium tax credit amount to reflect the monthly HRA allowance to eliminate the possibility of double benefits.
In this post, we'll go over which plans permit employees to access premium tax credits, how those credits are assessed, and how the Small Business HRA affects tax credit calculation.
What is the definition of an eligible employer-sponsored plan?
According to 26 USC Section 5000A(f)(2):
The term “eligible employer-sponsored plan” means, with respect to any employee, a group health plan or group health insurance coverage offered by an employer to the employee which is—
(A) a governmental plan (within the meaning of section 2791(d)(8) of the Public Health Service Act), or
(B) any other plan or coverage offered in the small or large group market within a State.
Such term shall include a grandfathered health plan described in paragraph (1)(D) offered in a group market.
As a Small Business HRA is not 1) a governmental plan, or 2) offered in the small or large group market within a State, the HRA is not an "eligible employer-sponsored plan".
Note: If an employer offers an integrated HRA, an HRA combined with a qualified and affordable group health insurance plan, employees would not be eligible for the individual premium tax credits as the group health insurance plan (which IS an "eligible employer-sponsored plan") would disqualify them.
What are the Individual Premium Tax Credits?
Significant tax credits are available to help individuals buy individual health insurance coverage through the state and federal health insurance marketplaces.
The tax credits will only be available to individuals who enroll through the INDIVIDUAL health insurance marketplace and are not already enrolled in an "eligible employer-sponsored plan".
If an employee is eligible for these tax credits, his or her cost of insurance will be capped at 2% - 9.5% of his or her household's income.
The tax credits are available for individuals and families who meet certain income requirements and do not have access to affordable health insurance through an "eligible employer-sponsored plan" or another government program.
For more details on eligibility and the credit amount see: What is my Individual Premium Tax Credit?
How the Small Business HRA Affects Premium Tax Credit Calculation
Employees participating in a Small Business HRA can access premium tax credits. However, the amount of the credit will be adjusted to account for the monthly HRA allowance the employee receives from his or her company.
Specifically, the amount of the credit will be reduced dollar-for-dollar by the monthly HRA amount.
For example, if an employee qualifies for a $500 premium tax credit but receives $400 in monthly contributions from her employer, she will receive a $100 premium tax credit.
This is done to prevent "double-dipping" on tax benefits, which could result in heavy penalties.
The Small Business HRA does not prevent employees from accessing premium tax credits. However, in order to prevent double benefits, employees must deduct their monthly HRA allowance from their calculated premium tax credits.
Doing so will protect against IRS penalties and preserve peace of mind.
Editor's Note: This post was originally published in May 2013.