Since the Affordable Care Act created premium tax credits in 2014, millions of low-income Americans were able to get more affordable access to health insurance premiums on the state and federal exchanges.
By 2016, the Small Business Healthcare Relief Act was passed, creating the qualified small employer health reimbursement arrangement (QSEHRA). With the creation of the QSEHRA, employees of small and midsize businesses suddenly had another way to help pay for their health insurance premiums and qualifying medical expenses.
Today, these employees now must coordinate their premium tax credit and their QSEHRA allowance to ensure they’re accurately calculating the final cost of their health insurance premiums.
In this article, we’ll explain what the law requires when coordinating premium tax credits and QSEHRA allowances, how employees can make sure their premium tax credit is calculated properly, and what the employer’s role is in helping employees make these calculations.
What are the IRS rules for QSEHRAs and premium tax credits?
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 QSEHRA allowance qualifies as “affordable coverage.”
If a QSEHRA doesn’t provide affordable coverage, the employee’s premium tax credit will be reduced, dollar-for-dollar, by the amount of their monthly QSEHRA allowance.
How is premium tax credit eligibility calculated?
Premium tax credit eligibility is calculated separately for each employee in a two-step process:
Step 1: Calculate whether the QSEHRA offers “affordable coverage”
In the first step, an employee determines whether their QSEHRA qualifies as affordable coverage. As a reminder, in 2021, the federal definition of “affordable coverage” as outlined in IRS Rev Proc. 2020-36 is a policy that costs 9.83% or less of a person’s household income. This percentage changes slightly every year.
To see if a QSEHRA has affordable coverage, the employee would take the premium for self-only coverage through the second-lowest-cost silver plan offered on their local exchange and subtract it by their monthly QSEHRA allowance.
If this amount is less than 9.83% of the employee’s household income for the month, then the QSEHRA allowance is considered affordable. This means the employee 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.
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 QSEHRA allowance. The law requires any premium tax credit to be reduced by the amount of the monthly QSEHRA allowance.
For example, let’s assume an employee is eligible for a $400 premium tax credit per month and also receives a $250 QSEHRA allowance from their employer. To calculate their new premium tax credit, they would subtract their $250 allowance from their $400 premium tax credit, leaving them with a tax credit of $150 for the month.
It’s possible that an employee’s tax credit will be reduced entirely by their QSEHRA allowance; however, it can’t be reduced below zero.
The employer’s role in determining premium tax credit eligibility
As a small business owner, you may be concerned about the affordability of your QSEHRA offering, but don’t worry! Employers are never involved with making premium tax credit calculations for their employees.
Not only would that violate your employees’ privacy, but it’s also nearly impossible to do. An employer can’t know whether an employee has any additional sources of income, whether from a spouse, a second job, or property ownership.
As for your employees, they will simply disclose their QSEHRA monthly allowance to the exchange, which will help calculate their eligibility on their own.
Employees participating in a QSEHRA may still claim premium tax credits, but they must include their allowance in affordability calculations in order to determine the final amount of their tax credit. This is a process the employee figures out on their own, so as a small business owner, you have no responsibility beyond educating your employees about the guidelines outlined in this article for coordinating their QSEHRA benefit and their premium tax credit.
This article was originally published on January 20, 2017. It was last updated July 2, 2021.