If you work or own a small business, you may be familiar with using HRA’s to help reimburse employees for individual health insurance. This strategy has been around for over a decade and has always been controversial under the tax code.
Small businesses that have struggled with group health insurance costs and participation requirements have utilized the HRA approach to offer employee benefits. Many of these small businesses are in industries or locations with lower compensated employees who qualify for Medicaid or under the Affordable Care Act qualify for subsidized health insurance (premium tax credits). This has created a tax advantage for both the employer and individual regarding individual health insurance.
The Government has now changed the regulations for HRA’s in conjunction with Individual health insurance reimbursements. If an employee participates in a company-sponsored HRA, they can no longer receive premium tax credits. This will negatively impact a lot of Hoosier that are not aware of these new regulations resulting in the paying back of all the premium tax credit one receives.
Here is an example of what is going to happen. An employee of Company X works for a company that provides $400 a month in an HRA benefit. The employee has a family of 5 with a household income of $80,000, which qualifies them for a tax credit/premiums assistance of $1,053 a month. The plan they choose on the marketplace costs $1,549 a month. Subtract the $1,053 tax credit, $400 HRA benefit- Now, the employee’s health plan for their entire family costs $96 a month. Great deal!
Now when that employee goes to filer their taxes, they will be required to pay the tax credit back. $12,636 This will create severe hardships for families that will not be aware of the new rules. Most employers offering the HRA do not have time to stay compliant on new rules and regulations, so they will not know, which leads to a massive surprise to the employees and employers.
For 2021, employers may want to reconsider offering an HRA if they suspect their employees will qualify for subsidized premiums on the exchanges.
Here is a link to healthcare.gov that provides more details.