Does QSEHRA disqualify employees from individual premium tax credits?

A common question we receive is whether offering a qualified small employer health reimbursement arrangement (QSEHRA) prevents employees from obtaining individual premium tax credits.

The answer depends on affordability, and if the employee remains eligible for tax credits due to an unaffordable allowance, they must make adjustments to accommodate how the credit is calculated.

In this post, we'll go over which plans permit employees to access premium tax credits, how those credits are assessed, and how the QSEHRA affects tax credit calculation.

What is the definition of an eligible employer-sponsored plan?

Employees under eligible employer-sponsored plans can't receive premium tax credits.

According to 26 USC Section 5000A(f)(2):

The term “eligible employer-sponsored plan” means, with respect to any employee, a group health plan or group health insurance coverage offered by an employer to the employee which is—

(A) a governmental plan (within the meaning of section 2791(d)(8) of the Public Health Service Act), or
(B) any other plan or coverage offered in the small or large group market within a State.

Such term shall include a grandfathered health plan described in paragraph (1)(D) offered in a group market.

As a QSEHRA is not a governmental plan or offered in the small or large group market within a state, the HRA isn't an eligible employer-sponsored plan. Therefore, your employees can still receive premium tax credits under a QSEHRA, though with special rules.

Note: If an employer offers an integrated HRA, an HRA combined with a qualified and affordable group health insurance plan, employees wouldn't be eligible for the individual premium tax credits as the group health insurance plan (which is an "eligible employer-sponsored plan") would disqualify them.

What are the individual premium tax credits?

Significant tax credits are available to help individuals buy individual health insurance coverage through the state and federal health insurance marketplaces.

• The tax credits will only be available to individuals who enroll through the INDIVIDUAL health insurance marketplace and are not already enrolled in an "eligible employer-sponsored plan".

• Because of the 2022 Inflation Reduction Act, no American will pay more than 8.5% of their household income for health insurance pemiums. Premium tax credits can cover the rest. 

• The tax credits are available for individuals and families who meet certain income requirements and don't have access to affordable health insurance through an "eligible employer-sponsored plan" or another government program.

How the QSEHRA affects premium tax credit calculation

Employees participating in a QSEHRA can access premium tax credits if the QSEHRA allowance isn't considered affordable. If your QSEHRA allowance is affordable, the employee can't receive any tax credits. If the allowance isn't affordable, employees must reduce their premium tax credit subsidy by the monthly HRA allowance they receive from their employer.

Specifically, the amount of the credit will be reduced dollar-for-dollar by the monthly HRA amount.

For example, if an employee qualifies for a $500 premium tax credit but receives $200 in monthly contributions from her employer, they will receive a $400 premium tax credit.

This is done to prevent "double-dipping" on tax benefits, which could result in heavy penalties.

Conclusion

If your QSEHRA allowance is unaffordable, your employee can still receive premium tax credits. However, to prevent double benefits, employees with unaffordable allowances must deduct their monthly HRA allowance from their calculated premium tax credits.

Doing so will protect against IRS penalties and preserve peace of mind.

This article is general in nature. If you need help with coordinating your QSEHRA and tax credits, contact a tax professional.

This blog article was originally published in May 2013. It was last updated on November 1, 2023.