On June 13, 2019, the federal government released a final ruling that created a new HRA called the individual coverage HRA (ICHRA) and included guidelines for making coverage under the HRA “affordable.” To be considered affordable, the cost of the lowest cost silver plan must not be more than 9.78% of an employee’s household income (9.83% for 2021).
However, through the changes put in place by the American Rescue Plan, all Americans who purchase health insurance under the federal exchanges or state-run markets will pay no more than 8.5% of their household income through the end of 2022.
If an ICHRA allowance makes the benefit affordable for an employee, it can impact their eligibility for a premium tax credit (PTC), as explained below.
You can use your online ICHRA affordability calculator to easily determine whether an allowance is affordable and get recommendations about whether to opt in or opt out based on your current health coverage status.
How being offered an ICHRA affects the Premium Tax Credit
When an employee is offered an ICHRA, it can impact their eligibility for the PTC, as follows:
- If an eligible employee is offered an ICHRA allowance that is considered affordable, they automatically become ineligible for a PTC; they have no choice in the matter.
- If an eligible employee is offered an ICHRA allowance that is considered unaffordable, they can opt out to remain eligible for the PTC.
- If an eligible employee opts in to the ICHRA, whether or not it is “affordable,” they automatically forfeit the PTC if they were eligible for it.
Affordability and the “family glitch”
The IRS bases eligibility for a family's premium tax credit on whether the ICHRA allowance is affordable for the employee only. This means that, through the end of 2022, if the ICHRA provides an allowance that does not require an employee to pay more than 8.5% of their household income towards their premium, premium tax credits are forfeited for the entire family, not just the employee.
Because of this, we recommend that organizations with a high percentage of employees who may be eligible for premium tax credits try to provide allowances large enough that employees can purchase family plans. Organizations also have the option to offer an ICHRA only to specific classes of employees that might not be eligible for premium tax credits anyway. For example, an employer might offer an ICHRA to salaried employees but not to hourly employees.
ICHRAs are an ideal way for employers to give their employees an allowance they can use to purchase exactly the coverage they need on a marketplace. But it’s important for employers to understand that offering an ICHRA to an employee could cause them to lose their premium tax credit. Our Personalized Benefits Advisors can help you evaluate your circumstances and choose the best option for your organization.
Are you interested in learning more about offering an ICHRA?
Watch our webinar: How the HRA works for employers