Employees participating in an individual coverage HRA (ICHRA) cannot collect premium tax credits. However, the federal government added some flexibility to the ICHRA rules.
With an ICHRA, employees have a choice: they can either participate in the HRA and waive their right to premium tax credits, or they can opt out of the ICHRA and (if qualified) collect their premium tax credits.
In this post, we’ll go over what the ICHRA regulations say about premium tax credits, how premium tax credits are affected by ICHRA availability, and what employees must do to opt in or out of the benefit.
Let’s get started.
What do the ICHRA regulations say?
The ICHRA regulations are clear in their handling of premium tax credits. On page 18 of the final rule, the Departments of the Treasury, Labor, and Health and Human Services state:
An individual is ineligible for the premium tax credit (PTC) for the individual’s Exchange coverage for a month if the individual is covered by an HRA or is eligible for an HRA that is affordable and provides minimum value (MV) for the month.
In plainer words, an employee (or any member of the employee’s family) can’t collect premium tax credits if they participate in the ICHRA.
The regulations offer employees a choice, though. They can opt out of the ICHRA and collect their premium tax credits, provided the benefit qualifies as “unaffordable” under the definition laid out in the Affordable Care Act (ACA). The Departments state:
An employee and a related HRA individual offered an individual coverage HRA that is not affordable will be eligible for the PTC (assuming they are otherwise eligible) if the employee opts out of the individual coverage HRA.
The regulations state that employees must be allowed to make the decision to opt out annually, and must make their decision before the ICHRA plan start date.
Now, let’s explore what these guidelines look like in practice.
Calculating affordability with an ICHRA
For employees who qualify for premium tax credits, the most important step in deciding whether or not to participate in the ICHRA is determining if the ICHRA benefit is “affordable.”
If the ICHRA is affordable, employees cannot collect tax credits by opting out of it. If the ICHRA is unaffordable, though, they can choose to opt out and use those credits.
The Departments state that an ICHRA is considered affordable if the employee’s required HRA contribution for the month is less than 1/12 of the employee’s household income for the taxable year multiplied by the required contribution percentage.
The employee’s required HRA contribution is determined by the difference between the premium of the lowest cost silver-level plan available on the local exchange and the company’s allowance for single employees.
The required contribution percentage, meanwhile, is adjusted annually. For the 2019 plan year, it is 9.86 percent.
Let’s look at an example.
Colin is an employee with Brower Construction Company, which pays him $60,000 a year. Brower Construction plans to offer an ICHRA for its employees with a monthly allowance of $100 for single employees. Colin would otherwise qualify for premium tax credits, so he must decide if the allowance is considered affordable or unaffordable.
The lowest cost silver-level plan available on the exchange in Colin’s area is $400 a month, which means employees’ required HRA contribution with this benefit is $300. One-twelfth of Colin’s income for the year is $5,000; multiplied by 9.86 percent, the figure is roughly $493.
Because $493 is more than the required HRA contribution of $300, Colin’s ICHRA benefit is considered affordable. This means that he cannot waive the benefit and collect his premium tax credits.
Wayne is another Brower Construction Company employee who qualifies for premium tax credits. Together, he and his wife earn $30,000 a year. One-twelfth of his income is $2,500; multiplied by 9.86 percent, the figure is about $246. Because $246 is less than the required HRA contribution of $300, Wayne’s ICHRA benefit is not considered affordable. That means he can waive ICHRA participation and collect his premium tax credits instead.
For purposes of this calculation, the ICHRA regulations state that employees must calculate roughly what they expect to earn on a monthly basis through the taxable year.
They must then choose to keep or waive the ICHRA before the benefit plan year begins.
Waiving premium tax credits in favor of the ICHRA
Employees who are otherwise eligible for premium tax credits may choose to waive access to those credits and participate in the ICHRA.
There are no formal requirements for employees who choose this path. Simply by choosing to participate in the ICHRA, employees are waiving their rights to premium tax credits.
Employees can reevaluate their choice and choose to opt out of the ICHRA in advance of the next plan year, but they can’t opt out midyear and then collect premium tax credits.
In our example above, Colin would take this path.
Opting out of the ICHRA in favor of premium tax credits
Employees whose ICHRA benefit is unaffordable may want to opt out of the ICHRA and collect premium tax credits instead. To do this, they must inform their company before the ICHRA plan start date. This choice applies to both the employee and their family.
Once they opt out of the ICHRA, they’re free to collect their premium tax credits without any qualification.
Employees can reevaluate their choice and choose to participate in the ICHRA during the next plan year, but once they’ve chosen to opt out, they can’t participate for the rest of that plan year.
In our example above, Wayne would take this path on behalf of himself and his wife.
Premium tax credits and the ICHRA notice requirement
Premium tax credit availability is one of the most important considerations employees must make with regard to the ICHRA. Recognizing that, the federal government requires that employers offering an ICHRA send employees a notice about the benefit that explains how the ICHRA affects premium tax credits.
The ICHRA notice covers many items, but its primary purpose is to help educate employees about their options regarding premium tax credits.
Employers should be ready to fulfill this requirement and offer any help their workers may need.
You can find sample notice language concerning premium tax credits in this FAQ document released by the IRS.
With the ICHRA, the federal government has offered some much-appreciated flexibility when it comes to premium tax credits. Employees can examine their personal circumstances, determine the best route for their family, and either opt in or opt out of the benefit.
State and federal exchanges should be working to help employees determine ICHRA affordability in 2020, but employers should be ready to help make the calculation as simple as possible through materials like the ICHRA notice.
Have questions about the ICHRA and premium tax credits? Let us know below!