A friendly reminder: Please note that we at Take Command Health are not licensed tax professionals.
One of the reasons why our clients partner with us is that we help them follow the rules. When the federal government puts out a 527 page set of rules about HRAs, we have people on our team who can't wait to read them (don't make fun of them, we all need someone like this in our life). They are able to pull out the important pieces of information for our clients and then we put them is easy to understand articles (ok, easier to understand). Earlier this year, the rules changed. Did you know that? We did.
People often ask if they have a QSEHRA can they still accept premium tax credits. It's a good question and the answer is, it depends. If the reimbursement offer you receive from your employer is considered affordable (which has a technical definition), you are not allowed to accept the premium tax credits. But if the offer you receive is not considered affordable, you are allowed to take them. If you take them, you can accept money from your employer as well, but you reduce your tax credit by the amount your employer is offering. (That was a confusing sentence, we will show you the math below.)
What is a Premium Tax Credit?
A premium tax credit is a subsidy which is available to those purchasing health insurance from the health insurance marketplace (exchange). The credit provides financial assistance to pay the premiums for the qualified health plan offered through a Marketplace.
What does affordable mean?
The government has rules about how much you are allowed to pay for your portion of your insurance premium. They calculate this number each year and for 2021, affordable means you are not paying more than 9.83% of your household income on your portion of the insurance premium. There is a really fun formula to calculate this (for those who like math), and soon we will have a tool to help you. But the safest assumption is that if your employer is offering more than your premium tax credits, you should take that offer (and ignore the tax credits). But, if the offer from your employer is less than your tax credits, take it and do the offset (explained below).
How will my QSEHRA impact my tax credit?
Now the math. If your employer has offered you a reimbursement amount that is not considered affordable, you are allowed to take the offer from your employer and the tax credit. But you have to make sure you reduce the amount you accept from the government by the amount your employer offered you.
Here is an example (with a chart below):
The cost of your plan is $500 per month
You are eligible for a $400 tax credit from the government
Your employer offers you a $300 reimbursement through your QSEHRA
If the $300 offer from your employer is considered affordable, you CANNOT take the premium tax credits and you pay $200 out of pocket.
If the $300 offer from your employer is considered unaffordable, you CAN take the $300 from your employer and $100 of the premium tax credits reducing the out of pocket to $100.
It’s important to note that you can’t opt-out of the QSEHRA and still receive your full tax credit. Your eligibility for tax credits is based on the reimbursement amount offered to you, not the amount you actually get reimbursed.
You may or may not already be using your entire tax credit, but the QSEHRA allowance will offset your eligible tax credit amount. This is to ensure you don't end up owing that money back to the IRS come tax season!
What should I do?
It is very important that employees purchasing a plan through the marketplace and receiving a premium tax credit adjust your tax credit accordingly. Failure to report the small business HRA to your insurer will result in having to pay back the tax credits to the IRS during tax time.
When you purchase your policy, you can request an adjusted tax credit from the exchange. If you’ve already purchased your plan, you can contact the exchange to let them know you want to reduce the tax credit that you are receiving.
We can help you understand the numbers and answer your questions about tax credits & QSEHRA. Reach out to firstname.lastname@example.org with your questions!
Employers will report the QSEHRA benefit offered to each employee on their W-2, regardless if they have received any reimbursement during the year. It is the QSEHRA allowance, not reimbursement amount that works against the tax credit. Therefore, we do not recommend employees opt-out of QSEHRA in attempt to keep the PTC.