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HRA and premium tax credits: how does it work?

Written by: Caitlin Bronson
February 21, 2019 at 11:26 AM

One of the most valuable features of a health reimbursement arrangement (HRA) is its ability to reimburse employees for individual health insurance policies tax-free.

Unlike group health insurance, HRAs give employees the freedom to choose insurance policies that fit their personal needs. Young, healthy employees may choose a high-deductible health plan to save money, while employees with a specific health issue may purchase a policy with extensive coverage. The business’s role is merely to reimburse the premium with the employee’s monthly HRA allowance.

With the advent of the Affordable Care Act (ACA), though, this system grew more complicated. The ACA introduced to health insurance shoppers the premium tax credit: a sum of money that effectively functions as a government subsidy. The premium tax credit alleviates the financial stress of purchasing individual health insurance by allowing recipients to apply the tax credit to their premium in advance, thus lowering the total cost of their policy.

Premium tax credits are a boon to individual health insurance shoppers, but they require extra effort to coordinate with an HRA. Because both HRA allowances and premium tax credits pay for the same item (health insurance premiums), employees must account for both. This plays out differently depending on which type of HRA the company is offering.

In this post, we’ll examine four of the most popular HRAs and explore how premium tax credits work with each.

Let’s get started.

The one-person stand-alone HRA and the retiree HRA

Both the one-person stand-alone HRA and the retiree HRA are modeled on the pre-2013 stand-alone HRA. Traditionally, these HRAs allowed employees to use premium tax credits before accessing HRA funds from their employers.

In 2015, though, the IRS issued regulations that imposed stricter rules.

The IRS stated that employees covered under either the one-person stand-alone HRA or the retiree HRA don't qualify for premium tax credits in any month they have funds available through the HRA. This includes any HRA funds remaining during the 90-day runout period following HRA cancellation.

However, employers offering the retiree HRA can choose to allow participants to opt out of the benefit if they wish. In this case, participants can choose between HRA funds and premium tax credits.


The qualified small employer HRA (QSEHRA) has specific rules relating to premium tax credit coordination.

QSEHRA recipients (including employees and their families) aren’t eligible for premium tax credits during any month the HRA allowance qualifies as “affordable coverage.”

If the allowance isn’t considered affordable, employees can collect their premium tax credit. However, the total amount of the credit must first be reduced by the total HRA allowance amount.

For example, let’s suppose an employee has a $500 premium tax credit and a $400 QSEHRA allowance from his company. In this case, the employee must subtract $400 from $500, leaving him with a $100 premium tax credit and his $400 QSEHRA allowance.

Employees with a QSEHRA cannot choose to opt out of the benefit in order to collect their full premium tax credit.

For more information, see “How to Calculate Your Premium Tax Credit with a QSEHRA.”


The individual-coverage HRA (ICHRA) is a new reimbursement-based benefit set to debut in January 2020. Its rules regarding premium tax credits are straightforward.

Any employee that participates in the ICHRA is not eligible for premium tax credits. However, if the employee would rather collect their premium tax credit than participate in the benefit, they can opt out of the ICHRA.

HRA premium tax credit comparison chart

Here’s a chart you can use to compare HRA premium tax credit information quickly.


Eligible for premium tax credits?

Premium tax credit coordination

Opt out available?

One-person stand-alone HRA



N/A (businesses wouldn't extend a one-person HRA to an employee with premium tax credits).

Retiree HRA



Yes, if the employer chooses to allow it.


Yes, if QSEHRA allowance is considered “unaffordable.”

Premium tax credits are reduced by the amount of the QSEHRA allowance.







HRA and premium tax credit coordination is an important item to consider in the age of the Affordable Care Act.

Your business’s choice of HRA may depend on how your employees use premium tax credits. If many of your employees are eligible for the credits, the ICHRA may be a better choice. If only a few of your employees are eligible—or if you don’t mind paying an amount the federal government would otherwise provider—the QSEHRA is a good fit.

For more information on premium tax credits, as well as other items to consider when comparing multiple HRAs, check out our new HRA comparison chart.

Questions? Let us know in the comment section below.

Topics: Health Reimbursement Arrangement, Qualified Small Employer HRA, Taxation, Individual Coverage HRA

Additional Resources

Which is better for you—the QSEHRA or the ICHRA? Get our chart to find out.
See what you can expect to pay for health insurance in your state.