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Small Business Employee Benefits and HR Blog

Small Business Tax Credit - HRA Distributions for Individual Health Insurance Premiums

This should not be taken as legal or tax advice.

small business tax creditsThe recently passed Affordable Care Act created a new tax credit for eligible small companies who provide health care to their employees.

In a previous post regarding how the small employer health care tax credit works, several readers asked if employer-sponsored HRAs (like ZaneHRA) would qualify for the tax credit.

Background

Many companies establish health reimbursement arrangements (HRAs) that allow employees to reimburse their individual health insurance premiums with tax-free dollars. If a company meets the size and annual wage requirements, and contributes at least 50% of employees' health insurance, then it may be eligible for the health care tax credit.

This post discusses how a company that sponsors an HRA described above might claim the tax credit.

HRA Contributions Do Not Qualify for the Tax Credit, but HRA Distributions May

The IRS recently issued IRS Notice 2010-82 to help companies determine if they qualify for the tax credit. Notice 2010-82 clearly states that HRA contributions do not qualify for the tax credit:

“...employer contributions to HRAs... are not taken into account for purposes of the credit.” 

However, it appears that HRA distributions qualify for the tax credit if the employer follows the guidelines outlined in Notice 2010-82 for “Employers Offering More Than One Plan”.

Important Note: In order to take the tax credit for employer contributions to multiple individual health plans, the employer must endorse specific individual policies as part of an employer-sponsored plan. As explained here, payment/endorsement of individual health insurance policies by an employer may cause federal compliance issues if the individual health plan premium is based on individual medical underwriting.

According to Notice 2010-82, in order to receive the tax credit, an eligible small employer must pay a uniform percentage (not less than 50 percent) of the premium for each employee enrolled in health insurance coverage offered by the employer. This is referred to as the uniform requirement.

If an employer offers more than one health insurance plan, the employer can satisfy the contribution requirement in one of two ways:

Option 1. The company can claim the credit if the the company's payments toward the premium for each plan satisfy the uniform requirement on a plan-by-plan basis.  The amounts or percentages of premium paid by the employer for each plan do not need to be the same as long as the payments satisfy the uniform requirement independently for each plan.

Option 2. The employer may designate a “reference plan” and make contributions in accordance with the following requirements:
    1. The employer determines a level of employer contributions for each employee such that, if all eligible employees enrolled in the reference plan, the contributions would satisfy the uniform requirement.
       
    2. The employer allows each employee to apply the amount determined in (1) either toward the reference plan or toward the cost of coverage under any of the other available plans.
       
    3. There is also an anti-abuse rule for employers offering more than one plan and using a reference plan. The self-only “composite rate” for the reference plan must be at least 66 percent of the self-only composite rate for each non-reference plan with respect to which the employer claims the credit. The “composite rate” is the average rate determined by adding the premiums for all employees eligible to participate in the a specific health insurance plan and dividing by the total number of such eligible employees.
Click here to read Notice 2010-82.
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