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 from a wider variety of insurance policies and customize them to 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 more extensive healthcare coverage. The employer’s role is merely to set up the HRA and then reimburse the expenses with the employee’s monthly HRA allowance.
However, with the advent of the Affordable Care Act (ACA), this system grew more complicated. The ACA introduced the premium tax credit, also known as a health insurance premium subsidy, to health insurance shoppers to help discount health insurance purchased on the health insurance marketplaces.
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 health insurance premiums, employees must account for both. This plays out differently depending on which type of HRA is being offered.
In this article, we’ll further examine what premium tax credits are and explain how to coordinate tax credits with two of the most popular HRAs:
- What is an advance premium tax credit (APTC)?
- How do premium tax credits work with a QSEHRA?
- How do premium tax credits work with an ICHRA?
- HRA premium tax credit comparison chart
- How a health stipend can benefit organizations with APTC eligible employees
What is an advance premium tax credit (APTC)?
The U.S. government created premium tax credits in 2014 as a way to provide discounts for health insurance to low-income individuals and families.
These tax credits alleviate the financial stress of purchasing an individual health insurance plan by allowing recipients to apply the tax credit to their monthly premium in advance, thus lowering the total cost of their policy.
Here’s how it works: When you apply for health insurance coverage, you estimate your yearly income. Once qualified for premium tax credits, you can use any portion of the tax credit to lower your monthly insurance premiums.
If you use fewer advance premium tax credits (APTC) than you qualify for, you get the rest back on your tax return. However, if you’ve taken more advance credit payments than you should’ve actually received, you’ll have to pay back any excess.
So, how is APTC eligibility determined? Whether or not you qualify for a tax credit depends on several factors, including where you live, your household income, and the number of dependents you have.
You can find out if you qualify by using KFF’s Health Insurance Marketplace Calculator.
How do premium tax credits work with a QSEHRA?
Employees who receive monthly allowances through a qualified small employer HRA (QSEHRA) can only take their premium tax credits if their QSEHRA allowance is considered unaffordable. You can learn more about determining if a QSEHRA allowance is affordable in our article.
If your employee's QSEHRA allowance is unaffordable, they can coordinate their health benefit with their premium tax credits. But, they must reduce their tax credit, dollar-for-dollar, by their monthly HRA allowance.
For example, let’s say an employee qualifies for a $500 premium tax credit, but they also receive a $200 monthly QSEHRA allowance from their employer. The employee must subtract their $200 QSEHRA allowance from their $500 tax credit, leaving them with a $300 APTC.
This is done to prevent “double-dipping” on tax benefits, which can result in heavy penalties from the IRS.
It’s important to note that employees with a QSEHRA can’t choose to opt out of the benefit to collect their premium tax credit.
How do premium tax credits work with an ICHRA?
Employees participating in an individual coverage HRA (ICHRA) can’t collect any amount of their premium tax credits. However, the federal government provided some flexibility to the ICHRA rules so employees can be sure they’re getting the best possible benefit.
With an ICHRA, employees have a choice: they can either participate in the HRA and waive their premium tax credits, or they can opt out of their ICHRA and collect premium tax credits if the ICHRA is considered unaffordable.
You can determine whether your ICHRA is affordable or not by using an affordability calculator.
An ICHRA is considered affordable if the employee’s HRA contribution is less than 1/12 of the employee’s household income for the taxable year multiplied by the required contribution percentage.
The HRA contribution is determined by the difference between the premium of the second lowest-cost silver-level plan available and the company’s allowance for single employees. The required contribution percentage, meanwhile, is adjusted annually by the IRS. The 2024 contribution percentage is 8.39%.
Any employee can choose to waive their tax credits and participate in an ICHRA. But, employees may only opt out of their ICHRA if it’s considered unaffordable.
As a new plan year comes around, you’re welcome to reevaluate your choice and choose to opt in or out of the ICHRA in advance of the next plan year, but you can’t make changes midyear. Once you’ve chosen to opt out, you can’t participate for the rest of that plan year.
If you’re offering an ICHRA to all of your full-time employees, keep in mind that in order for employees to be eligible, they must have individual health coverage that satisfies the requirements for minimum essential coverage (MEC).
HRA premium tax credit comparison chart
Take a look at this chart to quickly compare how to coordinate your premium tax credit with a QSEHRA and an ICHRA:
Eligible for premium tax credits?
Premium tax credit coordination?
Opt-out option available?
Yes, if the QSEHRA allowance is considered unaffordable.
Premium tax credits are reduced by the amount of the QSEHRA allowance for employees with unaffordable allowances.
N/A - Employees must either collect their premium tax credit or their ICHRA allowance based on affordability.
How a health stipend can benefit organizations with APTC-eligible employees
If your organization has employees who receive premium tax credits and you want to offer them a health benefit that doesn’t affect their APTC eligibility, you can always offer a health stipend.
Unlike an HRA, health stipends are considered taxable income and must be listed on your employees’ W-2s. Because there are no tax advantages to using a health stipend, avoiding IRS double-dipping penalties, employees can use their healthcare benefit and still receive their premium tax credits.
Stipends can be offered to employees as a reimbursement with a monthly allowance, like an HRA. However, because there are fewer regulations for health stipends, you are free to choose which health expenses are eligible for reimbursement, such as premiums, prescriptions, doctor visits, or other out-of-pocket expenses.
When offering a stipend, just remember that your employees will be responsible for paying any income taxes associated with their benefit.
Whether you offer your employees an HRA or a health stipend, there are important guidelines to keep in mind when making your premium tax credit work with a health benefit. While coordinating your premium tax credit and your HRA can seem tricky at first, following the guidelines in this article will help you understand how the two can work together.
If you want to ensure your employees maintain their APTC eligibility while taking advantage of a health benefit, a health stipend is always an alternative option.
Are you interested in offering an HRA or health stipend to your employees? Connect with a personalized benefits advisor today!
This blog article was originally published on February 21, 2019. It was last updated on March 10, 2022.