PTC and Opting Out of ICHRA Coverage

Starting in 2020, employers can set up individual coverage health reimbursement arrangements (ICHRAs) for employees and related individuals.  An ICHRA can reimburse an employee for individual coverage, including Marketplace insurance. However, employees and related individuals covered by an ICHRA are ineligible for the premium tax credit (PTC).

Employees have an opt-out option, but using it can be confusing.  Employees may mistakenly opt out thinking it preserves their PTC eligibility, only to find out that they have lost both the PTC and the right to ICHRA reimbursements. 

Individual Coverage HRAs and the Premium Tax Credit (PTC)

Until recently, employers could not simply reimburse their employees for the cost of health insurance coverage they bought for themselves or their families in the individual insurance market. This rule applied whether the employee bought individual coverage through a Marketplace Exchange, from an insurance broker, or directly from an insurer. 

Starting in 2020, employers can offer individual coverage health reimbursement arrangements (ICHRAs) that do exactly that.  The benefit to employees is that can use the employer subsidy to buy full-strength ACA approved coverage. This means preexisting conditions cannot be excluded, coverage cannot be dropped due to the insured getting sick, and women have full access to reproductive health care services.  

Risks for Employees

The downside for employees is that the very existence of their employer’s ICHRA can threaten their claim to a premium tax credit in two ways.

  1. the premium tax credit is unavailable if the employee enrolls in the offered ICHRA, and
  2. even if the employee does not enroll, the mere offer of coverage puts eligibility for the premium tax credit at risk unless the employee comes under the unaffordability exception.  

The unaffordability exception applies if both:

  • the coverage is “unaffordable” based on the cost and employee’s household income, and
  • the employee opts out of coverage for the coverage period.        

Unaffordable ICHRA Coverage

When deciding whether to opt out of ICHRA coverage, the key determination is whether the offered coverage is affordable. If it is affordable, the employee gains no advantage by opting out.  

An ICHRA is treated as affordable for an employee and related individuals if the monthly premium of the self-only lowest cost-silver plan (LCSP) in the employee’s rating area, minus the monthly amount made available to the employer under the ICHRA does not exceed the required contribution percentage of 1/12 the employer’s household income. The required contribution percentage is 9.5 percent adjusted annually after 2014. The percentage for 2020 is 9.78 percent.

Affordability Formula

Under these rules, an ICHRA is affordable for a month if the employee’s required HRA contribution is less than or equal to the required contribution percentage of household income.  More specifically, an ICHRA is affordable if the following relationship holds true: the monthly self-only LCSP monthly premium − the monthly ICHRA amount ≤ household income for the tax year × the required contribution percentage) / 12.

Comment: Note that ICHRA coverage that is affordable HRA means the employee cannot qualify for a PTC even if the employee opts out. It therefore makes no sense for an employee to opt out of an affordable plan for PTC reasons even if the employee would be financially better off if the employer had offered no plan.

Single Coverage Example. Andrea is single and has no dependents. Her household income is $28,000. She works for Employer X for all of 2020. X offers its employees an ICHRA that reimburses $2,400 of medical care expenses for single employees with no children (the self-only HRA amount) and $4,000 for employees with a spouse or children for the medical expenses of the employees and their family members. Andrea enrolls in a qualified health plan through the Marketplace exchange in her rating area for all of 2020. The monthly premium for the lowest cost silver plan for self-only coverage (LCSP) offered in her area is $500. Her required HRA contribution is $300 ($500 − ($2,400 / 12)). Her household income ($28,000) times 9.78 percent (the required contribution percentage in 2020) divided by 12 is $228. Because her required HRA contribution of $300 exceeds $228, the HRA is unaffordable for Andrea for each month of 2020. If Andrea opts out of and waives future reimbursements from the HRA, may take the PTC if otherwise eligible.

Exchange’s Affordability Determination

There is an affordability safe harbor for employees. If a Marketplace Exchange determines that an ICHRA is not affordable for a month for an employee or a related HRA individual for the period of enrollment, the coverage will be treated for premium tax credit purposes as unaffordable even if it turns out the coverage was affordable.

Amounts Used for Affordability Determination

Only amounts that are newly made available for the plan year of the HRA and determinable within a reasonable time before the beginning of the plan year of the HRA are considered in determining whether an ICHRA is affordable. Amounts made available for a prior plan year that carry over to the current plan year are not taken into account. Similarly, amounts made available to account for amounts remaining in a different HRA or other account-based group health plan the employer previously provided to the employee and under which the employee is no longer covered are not taken into account.

Affordability for Part-Year Period

An individual coverage HRA is affordable for a part-year period if the employee’s annualized required HRA contribution for the part-year period does not exceed the required contribution percentage of the taxpayer’s household income for the tax year. The employee’s annualized required HRA contribution is the employee’s required HRA contribution for the part-year period times a fraction, the numerator of which is 12 and the denominator of which is the number of months in the part-year period during the applicable taxpayer’s taxable year. Only full calendar months are included in the computation.

Post-Employment Coverage

An individual who is offered an individual coverage HRA for months after an employee terminates employment with the employer offering the HRA is eligible for minimum essential coverage under the HRA (and hence not eligible for the premium tax credit) unless the employee forfeits or opts out of and waives future reimbursements.

Examples from the Regulations

Family Coverage Example: In 2020, Bertrand is married with one child who is his dependent. His household income is $28,000. He works for Employer X for all of 2020. X offers its employees an ICHRA that reimburses $3,600 of medical care expenses for single employees with no children (the self-only HRA amount) and $5,000 for employees with a spouse or children for the medical expenses of the employees and their family members. Bertand, his spouse, and his child enroll in a qualified health plan through the exchange in the rating area in which he resides and they remain enrolled for all of 2020. No advance credit payments are made for their coverage. The monthly premium for the lowest cost silver plan for self-only coverage of Bertand that is offered in the exchange for the rating area in which he resides is $500. Bertrand’s required HRA contribution is $200, the excess of $500 (the monthly premium for the lowest cost silver plan for self-only coverage for Bertrand) over $300 (1/12 of the self-only HRA amount provided by employer X to its employees). In addition, 1/12 of the product of 9.78 percent (the required contribution percentage in 2020) and Bertand’s household income for 2020 is $228 ($28,000 x .0978 = $2,738; $2,738/12 = $228). Because his required HRA contribution of $200 does not exceed $228 (1/12 of the product of 9.78 percent and his household income for 2020), the HRA is affordable and Bertand cannot qualify for a PTC in 2020.

Safe Harbor Example: The facts are the same as above, except that when Bertand enrolled in the exchange coverage he received a determination by the exchange that the HRA was unaffordable because Bertand believed his household income would be lower than it turned out to be. Consequently, advance credit payments were made for their 2020 coverage. The HRA is considered unaffordable for Bertand, his spouse, and his child for each month of 2020 provided that Bertrand did not, with intentional or reckless disregard for the facts, provide incorrect information to the exchange concerning the HRA.

Partial Year Example:  Charles works for Employer X. His household income for 2020 is $28,000. X offers its employees an ICHRA that reimburses medical care expenses of $3,600 for single employees without children (the self-only HRA amount) and $5,000 to employees with a spouse or children for the medical expenses of the employees and their family members. X’s HRA plan year is September 1 to August 31 and Chares is first eligible to participate in the HRA for the period beginning September 1 of 2020. Charles enrolls in a qualified health plan through the Exchange in the rating area in which he resides for all of 2020. The monthly premium for the lowest cost silver plan for self-only coverage of Charles that is offered in the exchange for the rating area in which Charles resides for 2020 is $500. Affordability of the HRA is determined separately for the period September 1 through December 31 of 2020, and for the period January 1 through August 31 of Year 2. Charles’ required HRA contribution for the period September 1 through December 31 of 2020 is $200, the excess of $500 (the monthly premium for the lowest cost silver plan for self-only coverage for Charles) over $300 (1/12 of the self-only HRA amount provided by X to its employees). In addition, 1/12 of the product of 9.78 percent (the required contribution percentage for 2020) and Charles’ household income is $228 ($28,000 x .0978 = $2,738; $2,738/12 = $228). Because Charles’s required HRA contribution of $200 does not exceed $228, the HRA is affordable for Charles for each month in the period September 1 through December 31 of 2020. Affordability for the period January 1 through August 31 of Year 2 is determined using Charles’ Year 2 household income and required HRA contribution.

Carry-Over Example: Darla works for Employee of X for all of 2020 and Year 2. She is single. For 2020 and Year 2, X offers its employees an individual coverage HRA that provides reimbursement for medical care expenses of $2,400 to single employees with no children (the self-only HRA amount) and $4,000 to employees with a spouse or children for the medical expenses of the employees and their family members. Under the terms of the HRA, amounts that an employee does not use in a calendar year may be carried over and used in the next calendar year. In 2020, Darla used only $1,500 of her $2,400 maximum reimbursement and the unused $900 is carried over and may be used by her in Year 2. Only the $2,400 self-only HRA amount offered for Year 2 is considered in determining whether the HRA is affordable for Darla. The $900 carryover amount is not considered in determining the affordability.

Conclusion

ICHRAs are an option for employers that would prefer to avoid the trouble of providing a traditional plan, but want to allow their employees to buy their own individual coverage.  Employees need to be wary however because ICHRA coverage could make them ineligible for a premium tax credit. Opting out of ICHRA coverage makes sense only if the offered coverage is unaffordable for the employee.

By James Solheim, J.D.

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CCHTaxGroup

All stories by: CCHTaxGroup