Can I pair employer benefits with premium tax credits?

Many employers are moving away from traditional group health insurance by offering more affordable and flexible health benefits like health reimbursement arrangements (HRA) or health stipends. At the same time, many employees are taking advantage of health insurance subsidies, such as premium tax credits.

Employees often ask, “Will the federal government penalize me for getting a subsidy when my employer offers benefits?” As an employer, you’ll need to know which health benefits options you can offer your employees without risking their health insurance subsidies.

Takeaways from this blog post:

• Premium tax credits and cost-sharing subsidies are forms of financial help available to individuals to help pay for health insurance premiums and out-of-pocket costs. Individuals who meet income requirements and don't have affordable employer-sponsored coverage can qualify for health insurance subsidies.
• Health reimbursement arrangements (HRAs) are an excellent way for employers to reimburse employees for medical expenses. Depending on their HRA allowance amount, employees with a qualified small employer HRA (QSEHRA) or an individual coverage HRA (ICHRA) may need to reduce or waive their premium tax credits.
• Health stipends are a taxable alternative to HRAs that allow eligible employees to receive premium tax credits in addition to a monthly allowance to use on insurance premium costs and out-of-pocket expenses.

What is a health insurance subsidy?

A health insurance subsidy is a form of financial help available to individuals from the federal government to help pay for health insurance premiums and out-of-pocket costs. The Affordable Care Act (ACA) established two types of subsidies in 2014: premium tax credits and cost-sharing reductions (CSRs).

Premium tax credits are available on your tax return or as advance premium tax credits (APTC), which help to lower monthly health insurance premiums for individuals based on income, household size, and the average cost of health insurance coverage in your area. This allows individuals without medical coverage to purchase a marketplace plan.

If you use more advance premium tax credits than you’re entitled to, you’ll have to pay the federal government back on your federal income tax return. Likewise, if you use less than you’re eligible for, you’ll get the remainder back on your tax return. You can reconcile your PTCs with IRS Form 8962.

CSRs help reduce out-of-pocket expenses by lowering an individual’s deductible, coinsurance, copays, and out-of-pocket maximums for their insurance policy. You usually only qualify for one form of financial assistance or the other, but receiving both premium subsidies and CSRs is possible in certain circumstances.

Which employees benefit from health insurance subsidies?

Employees who meet specific income requirements and don’t have access to an affordable job-based health plan or government insurance plan are eligible for health insurance subsidies, including premium tax credits.

In 2021, the American Rescue Plan extended eligibility criteria for premium tax credits by eliminating the rule that taxpayers can’t receive tax credits if their actual household income is above 400% of the federal poverty level.

The Act also created a temporary rule that no one will pay more than 8.5% of their household income on health insurance from a public exchange, like the federal Health Insurance Marketplace or a state-based exchange, through 2022. The Inflation Reduction Act of 2022 extended this rule through 2025.

To be eligible for premium subsidies on Marketplace coverage after 2025, you must have an annual household income limit between 100% and 400% of the poverty line. Other eligibility factors include the cost of health coverage, where you live, and your household size.

You can determine if you qualify for premium tax credits by using KFF’s Health Insurance Marketplace Calculator¹. Remember, you can’t receive government subsidies if you purchase coverage from a private health insurance exchange.

What health benefits can your employees pair with APTC without risking penalties?

When offering your employees a health benefit, you must be careful. If they receive a medical care subsidy, you could penalize your employees at tax time if they take their APTC and the benefit due to the benefit being unaffordable. In some cases, your benefit could result in your employees losing their health insurance subsidy and having to pay back the APTC they received.

Understanding how to coordinate premium tax credits with various health benefits will help you and your employees avoid penalties.

Applicable large employers (ALEs) with 50 or more full-time equivalent employees (FTEs) must provide an affordable health benefit with minimum essential coverage (MEC) that meets minimum value standards. But this doesn’t mean you must offer traditional employer-sponsored coverage.

If you decide to offer a group health plan, your employees will no longer be eligible for a premium tax credit subsidy. While this works in the employees’ favor since they no longer need their own individual health insurance policy, adding employer-sponsored coverage can be expensive and time-consuming. For most small businesses, offering a traditional employer-sponsored plan isn’t practical.

Thankfully, there are other alternatives for providing health benefits to your employees. This includes HRAs and health stipends.

How employees can coordinate premium tax credits with a health reimbursement arrangement

An HRA is a popular health coverage option for organizations that allows business owners to reimburse their employees for healthcare expenses. However, depending on the type of HRA an employer offers, employees may have to reduce or waive their premium tax credits.

With a qualified small employer HRA (QSEHRA), your employees can only use their premium tax credits if their QSEHRA allowance is unaffordable. If their QSEHRA allowance is unaffordable, they can collect their tax credits and use the HRA, but they must reduce their premium subsidies by the monthly allowance of the QSEHRA. If the QSEHRA allowance is affordable, they can’t claim their premium tax credits. But an affordable QSEHRA allowance means you’re giving your employee enough money for health insurance coverage in their area.

With an individual coverage HRA (ICHRA), employees can only use their premium tax credits and waive the ICHRA if the ICHRA amount is unaffordable. If their ICHRA allowance is affordable, they must waive their tax credits entirely. To learn more about calculating affordability, use our free affordability calculator.

Of course, suppose you decide to offer a generous HRA allowance to your employees. In that case, premium tax credits may no longer be necessary because they’ll receive a more significant benefit than the tax credit provided.

For example, if an employee gets a $300 APTC each month, but you offer them a $600 ICHRA allowance, your employee would waive their APTC and take the $600 health benefit.

Learn more about coordinating premium tax credits and HRAs in our article

How pairing premium tax credits with a health stipend benefits employees

If you have many APTC-eligible employees, an HRA may not be your best bet if you can’t offer an affordable allowance. But, if you’re still looking to offer your employees comprehensive coverage for both monthly premium payments and out-of-pocket expenses, you should consider a health stipend.

An alternative to HRAs, health stipends are monthly allowances offered to employees, usually as a healthcare expense reimbursement. Employees submit a request for reimbursement, and the employer approves the amount.

Health stipends are taxable, meaning they appear on your employees’ W-2s. Because they aren’t tax-advantaged, you can offer your employees a health stipend benefit, and they can still receive their premium tax credits or healthcare subsidies.

If you allow your employees to use their health stipends for monthly premiums and out-of-pocket expenses, they’ll be free to choose how they want to use their monthly allowance. This could mean an eligible employee can use their APTC on their marketplace insurance premiums while using the health stipend for other out-of-pocket medical costs.

One thing to be aware of when offering a health stipend is that offering too much could impact the size of your employees’ healthcare subsidy by increasing their household income. If your employees’ income is at the borderline for receiving certain amounts on their premium tax credits, a health stipend could push their income over the limit. However, taxable health benefits don’t impact subsidy eligibility.

This is why it’s always best for employees to overestimate their annual income when applying for premium tax credits. That way, they’d get more money back on their tax return if they were eligible for more. Otherwise, they could owe the IRS for any excess advance payments they received.

It’s also critical to note that ALEs (those with 50 or more FTEs) can’t offer a stipend instead of an ICHRA or group health insurance because stipends don’t satisfy the ACA’s employer mandate.

Conclusion

When offering health insurance coverage to employees, business owners need to understand how these benefits might impact their eligibility for government subsidies like premium tax credits. Otherwise, your employees could face penalties when they file their tax returns.

You can coordinate HRAs and health stipends with APTC. The taxable nature of health stipends allows your employees to continue to be eligible for their premium tax credits while providing them with the most flexibility.

With PeopleKeep, you can create a personalized health benefit that works with your employees’ premium tax credits. Our benefits administration software can help you set up and manage an HRA in minutes.

Download our guide to designing attractive and customized employee benefits for your organization to learn more.

This blog article was originally published on September 6, 2013. It was last updated on March 25, 2024.

1. https://www.kff.org/interactive/subsidy-calculator/