Many employers are transitioning away from traditional group health insurance by offering more flexible health benefits such as a health reimbursement arrangement (HRA) or health stipend. At the same time, many employees are taking advantage of health insurance subsidies, such as premium tax credits.
Employees often ask, “Will I be penalized for getting a subsidy when my employer offers benefits?” As an employer, you’ll need to know which health benefits options you can offer your employees without risking their health insurance subsidies.
This article will explain how to pair benefits like health stipends with insurance subsidies without penalizing your employees. Use the links below to jump to the topic you’re most interested in:
- What is a health insurance subsidy?
- Which employees benefit from health insurance subsidies?
- What health benefits can be paired with APTC without risking penalties?
- How pairing premium tax credits with a health stipend benefits employees
What is a health insurance subsidy?
A health insurance subsidy is a form of financial help available to individuals by the federal government to help pay for health insurance premiums and out-of-pocket costs. The Affordable Care Act (ACA) established two types of subsidies in 2014: premium tax credits and cost-sharing reductions (CSRs).
Premium tax credits are available on your tax return or as advance premium tax credits (APTC), which help to lower monthly health insurance premiums for individuals based on income, household size, and the average cost of health insurance coverage in your state. This allows individuals who don’t have medical coverage to purchase a marketplace coverage plan.
If you use more than you’re entitled to, then you’ll have to pay the government back on your tax return. Likewise, if you use less than you’re eligible for, you’ll get the remainder back on your tax return.
There’s also a subsidy called cost-sharing reductions (CSRs), which help reduce out-of-pocket expenses by lowering an individual’s deductible, coinsurance, copays, and out-of-pocket maximums for their insurance policy.
You usually only qualify for one or the other, but it’s possible to receive both premium tax credits and CSRs.
Which employees benefit from health insurance subsidies?
Employees who meet certain income requirements and don’t have access to an affordable employer-sponsored group health insurance policy or government insurance plan are eligible for health insurance subsidies, including premium tax credits.
The Inflation Reduction Act of 2022 extended eligibility requirements for premium tax credits by eliminating the rule that taxpayers can’t receive tax credits if their household income is above 400% of the federal poverty level. It also implemented a temporary rule that no one will pay more than 8.5% of their household income on health insurance from federal or state-run marketplaces through 2025.
Other eligibility factors include the cost of health coverage, where you live, and your family size.
You can determine if you qualify for premium tax credits by using KFF’s Health Insurance Marketplace Calculator.
What health benefits can be paired with APTC without risking penalties?
When offering a health benefit to your employees, you need to be careful. If they receive a healthcare subsidy, you could end up penalizing your employees at tax time if they take their APTC and the benefit. In some cases, your benefit could result in your employees losing their health insurance subsidy and having to pay back the APTC they received.
Applicable large employers (ALEs) with 50 or more full-time equivalent employees (FTEs) must provide a health benefit with minimum essential coverage (MEC). But this doesn’t mean that you have to offer a traditional group health plan.
If you decide to offer a group health plan, your employees will no longer be eligible for a premium tax credit subsidy. While this works in the employees’ favor since they no longer need their own individual health insurance policy, adding employer-sponsored coverage can be expensive and time-consuming. For most small businesses, offering group health insurance coverage isn’t practical.
Thankfully, there are other alternatives for providing health benefits to your employees.
An HRA is a popular health benefit option for organizations that allows employers to reimburse their employees for healthcare expenses. However, depending on the type of HRA offered, employees may be required to reduce or waive their premium tax credits.
With a qualified small employer HRA (QSEHRA), your employees can only use their premium tax credits if the QSEHRA allowance is considered unaffordable. To learn more about calculating affordability with a QSEHRA, see our article. If your QSEHRA allowance is unaffordable, employees must reduce their premium tax credit subsidy by the monthly allowance of the QSEHRA. Employees can't opt out of a QSEHRA.
With an individual coverage HRA (ICHRA), employees can only use their premium tax credits and waive the ICHRA if the ICHRA amount is considered unaffordable. To learn more about calculating affordability, use our free affordability calculator.
Of course, suppose you decide to offer a generous HRA allowance to your employees. In that case, premium tax credits may not be necessary for them anymore because they’ll be receiving a more significant benefit than the tax credit provided. For example, if an employee gets a $300 APTC each month but you decide to offer a $600 ICHRA allowance, your employee would waive their APTC and take the $600 health benefit.
With HRAs off the table for some businesses with APTC-eligible employees, what other health benefits options are available?
If you’re looking to offer your employees a comprehensive health benefit that they can use for both premiums and out-of-pocket expenses, then you should consider a health stipend.
How pairing premium tax credits with a health stipend benefits employees
An alternative to HRAs is a health stipend. Health stipends are monthly allowances offered to employees, usually as a healthcare expense reimbursement. Employees submit a request for reimbursement, and the employer approves the amount.
Health stipends are taxable, meaning they appear on your employees’ W-2s. Because they aren’t tax-advantaged, your employees can be offered a health stipend benefit while still receiving premium tax credits or healthcare subsidies.
If you allow your employees to use their health stipends for both insurance premiums and out-of-pocket expenses, they’ll have the freedom to choose how they want to use their monthly allowance. This could mean that an employee uses their APTC on their marketplace insurance premiums while using the health stipend for out-of-pocket costs.
The only thing to be aware of with offering a health stipend is that offering too much could impact the size of your employees’ healthcare subsidy by increasing their household income. If your employees’ income is at the borderline for receiving certain amounts on their premium tax credits, a health stipend could push their income over the limit. However, taxable health benefits don’t impact eligibility.
This is why it’s always best for employees to overestimate their annual income when applying for premium tax credits. That way, if they were eligible for more, they’ll get more money back on their tax return. Otherwise, they could owe the IRS for any excess APTC received.
When looking to offer health benefits to employees, it’s essential for employers to understand how these benefits might impact their eligibility for premium tax credits. Otherwise, your employees could face penalties when they file their tax returns.
You can coordinate HRAs and health stipends with APTC. The taxable nature of health stipends allows your employees to continue to be eligible for their premium tax credits while providing them with the most flexibility.
With PeopleKeep, you can create a personalized health benefit that works with your employees’ premium tax credits.
Schedule a call with a personalized benefits advisor today to discuss the best health benefits option for your organizationThis blog article was originally published on September 6, 2013. It was last updated on March 17, 2022.