While the two types of HRAs do share many features, the creators of the Small Business HRA made several modifications to ensure the new benefit’s compatibility with the Affordable Care Act (ACA). One of these modifications is a requirement on how premium tax credits must interact with the Small Business HRA.
The 21st Century Cures Act specifies that an individual must coordinate their premium tax credits with the monthly contributions they receive through their employer’s Small Business HRA.
In this post, we’ll explain what the law requires and how your employees can make sure their premium tax credit is calculated properly once they’re enrolled in your Small Business HRA.
What the IRS Code Requires
IRS Code Section 36B—which was amended by the 21st Century Cures Act—states that employees, their spouses, and their dependents are not eligible for premium tax credits during any month in which their Small Business HRA allowance qualifies as “affordable coverage.”
If the Small Business HRA doesn’t provide affordable coverage, the employee’s premium tax credit will be reduced by the amount of their monthly Small Business HRA allowance.
Premium tax credit eligibility is calculated separately for each employee in a two-step process.
Step 1. Calculate Whether the Small Business HRA Offers “Affordable Coverage”
In the first step, an employee determines whether their Small Business HRA qualifies as affordable coverage. As a reminder, in 2017, the federal definition of “affordable coverage” is a policy that costs 9.69 percent or less of a person’s household income.
That means that for a Small Business HRA to be considered affordable coverage for the month:
The employee’s premium for self-only coverage through the second-lowest-cost silver plan offered on their local exchange, subtracted by the employee’s monthly HRA allowance, is less than 9.69 percent of the employee’s household income for the month.
If these conditions are met, the employee has affordable coverage and doesn’t qualify for a premium tax credit. If the conditions are not met, the employee may be eligible for a credit, depending on calculations made in step two.
Let’s look at an example. An employee at ABC Company, Becca, is granted $3,000 a year through her employer’s Small Business HRA. This is equal to a monthly allowance of $250 a month.
If Becca’s premium for self-only coverage through the second-lowest cost silver plan on her exchange is $250 or less, she doesn’t qualify for a tax credit. If the premium cost is more than that, however, she must subtract the amount of her HRA monthly allowance from that cost. Let’s say the exchange premium is $450. $450–250 = $200. If $200 is equal to or less than 9.69 percent of Becca’s income for the month, the Small Business HRA is affordable and she doesn’t qualify for a premium tax credit that month. In this example, Becca would not qualify for premium tax credits if she were earning $2,064 per month or more.
However, if $200 is greater than 9.69 percent of Becca’s monthly income (i.e., Becca is earning $2,063 per month or less), she does qualify for a credit and can move on to step two.
Tip: To do this calculation for yourself, take the amount of the second-lowest-cost silver plan in your area minus your monthly HRA allowance, and divide by 0.0969. If that number is bigger than what you earn every month, you will qualify for a premium tax credit.
Step 2. Calculate the New Premium Tax Credit
If an employee is eligible for a premium tax credit, they must make sure the amount of the tax credit is adjusted to reflect their monthly HRA allowance.The law requires any premium tax credit to be reduced by the amount of the monthly HRA allowance.
For example, let’s assume Becca of ABC Company is eligible for a $400 premium tax credit per month. Because she receives a $250 HRA allowance from her company, she must subtract $250 from $400, leaving her with a tax credit of $150 for the month.
It’s possible that an employee’s tax credit will be reduced entirely by the HRA allowance; however, it cannot be reduced below zero.
Your Company’s Role in Determining Premium Tax Credit Eligibility
As a small business owner, you may be concerned about the affordability of your HRA offering. However, companies are never involved with making premium tax credit calculations for their employees. Not only would that violate the employee’s privacy, but it’s also nearly impossible to do. An employer cannot know whether an employee has additional sources of income, whether from a spouse, a second job, or property ownership.
As for your employees, they must disclose their HRA monthly allowance to the exchange, which will help calculate their eligibility.
Employees participating in a Small Business HRA may still claim premium tax credits, but they must include their HRA allowance in affordability calculations and in order to determine the final amount of the tax credit.
What questions do you have about premium tax credit coordination with the Small Business HRA? Let us know in the comments section below.