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How to calculate your premium tax credit with a QSEHRA

Written by: Gabrielle Smith
July 2, 2021 at 7:52 AM

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.

Watch our video to learn more about how premium tax credits work across all HRA types

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 if an employee qualifies for a premium tax credit and also has a QSEHRA allowance, their premium tax credit must be reduced, dollar-for-dollar, by the amount of their 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.

Learn more about HRAs and premium tax credits work together

How is premium tax credit eligibility calculated?

Thanks to the changes made by the American Rescue Plan, more Americans than ever qualify for a premium tax credit to reduce the cost of their monthly health insurance premiums. Through these changes, no American will ever pay more than 8.5% of their annual household income for health coverage.

There are several online tools available to help you calculate your premium tax credits, including the Kaiser Family Foundation’s Health Insurance Marketplace Calculator.

This tool gives you an estimate on what you will pay for health insurance and how likely you are to be eligible for a premium tax credit based on the personal information you provide.

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.

Conclusion

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.

Topics: Health Reimbursement Arrangement, Qualified Small Employer HRA, Premium Tax Credits

Additional Resources

Considering self-administering your QSEHRA? Find out what it takes.
Have questions about reimbursing your employees' health costs? Get answers.

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