With open enrollment coming up, many small and medium-sized businesses are contemplating moving their employees to the individual health insurance market. A common question many of these business owners ask is "does reimbursing our employees' individual health insurance premiums disqualify them from receiving premium tax credits?" The answer is no.
Employees who receive a healthcare allowance through a premium reimbursement plan still have access to premium tax credit, as long as they meet other eligibility criteria, based on household size and income. This is due to the fact that, if properly set up, a premium reimbursement plan is not an "eligible employer-sponsored plan.
What is 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—
(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.
A premium reimbursement plan is not 1) a governmental plan, or 2) offered in the small or large group market within a state, so the premium reimbursement plan is not an "eligible employer-sponsored plan".
Tip: Care must be taken in the design and administration of the premium reimbursement plan to ensure the plan does not meet the definition of an eligible employer-sponsored plan in IRC Section 5000A and consequently qualify as minimum essential coverage. This ensures employees participating are able to receive the premium tax credit, assuming they meet additional eligibility criteria.
How Do Premium Tax Credits Work?The federal government provies discounts on individual health insurance to individuals and families who qualify. These discounts are called “premium tax credits,” or “premium subsidies” and are available for policies purchased through the Health Insurance Marketplaces run by each state.
Eligibility for these premium tax credits is based on the following factors:
Income requirements: families who earn up to 400% of the FPL (Federal Poverty Line) may be eligible for premium tax credits
Household size: income requirements are also dependent on how many family members are living in a household; for example, an individual earning up to $46,680 in 2014 would be eligible for a premium tax credit, while a family of four earning up to $95,400 in 2014 would be eligible for a premium tax credit
Access to affordable health insurance: individuals who have access to healthcare through their employer or a government program, such as CHIP, Medicaid, Tricare, etc. would not be eligible for a premium tax credit
For more details on premium tax credits, see this guide.
How You Can Take Advantage of Cost Savings with the Premium Tax Credits
You can take advantage of the premium tax credit savings while still offering your employees a valuable healthcare benefit by reimbursing their individual health insurance premiums. Your employees can access the premium tax credits by purchasing a policy on the Marketplace. Employees only receive reimbursements for the non-subsidizes portion of their premium.
With this type of arrangement, both you and your employees can save a combined 50 percent on your health insurance costs. This has become a huge trend this year among small and medium-sized businesses. Rather than simply offering your employees a stipend, implementing a formal premium reimbursement plan offers ensures that your employees are spending the funds on health insurance.
Since a premium reimbursement plan is not an "eligible employer-sponsored plan", it does not satisfy the employer shared responsibility provision (employer mandate) of the ACA. The requirement is only applicable to businesses with 50+ full time equivalent (FTE) employees.
For businesses with less than 50 FTE employees, a premium reimbursement plan combined with individual health insurance is a no-brainer.
Businesses with 50+ FTE employees should conduct a cost analysis to compare the cost and benefits of (1) offering group health insurance, (2) offering nothing, or (3) accepting any applicable tax penalties and offering premium reimbursement plan.
See this example of a premium reimbursement plan and premium tax credits and see how this would work in real life.