Understanding ICHRA with premium tax credits

TL;DR

• Individual Coverage Health Reimbursement Arrangements (ICHRA) allow employers to reimburse employees for individual health insurance premiums and medical expenses, offering flexibility and personalization in healthcare choices.

• As part of the Affordable Care Act, Premium Tax Credits reduce health insurance costs for individuals with low to moderate incomes, available for those buying insurance through the Health Insurance Marketplace without an affordable employer plan.

• Employees offered an ICHRA are typically ineligible for Premium Tax Credits unless the ICHRA is deemed unaffordable. This interaction can create a complex decision-making process for employees navigating between employer-sponsored benefits and tax credits, impacting healthcare affordability and accessibility.

The basics

ICHRAs represent a modern approach to employer-funded health benefits. Introduced in January 2020, these arrangements allow employers to reimburse employees for their individual health insurance premiums and other medical expenses, rather than providing a traditional group health plan. This model offers flexibility and personalization, enabling employees to choose plans that best fit their needs while allowing employers to control costs.

On the other hand, Premium Tax Credits are a cornerstone of the Affordable Care Act (ACA). These credits make health insurance more affordable for individuals and families with low to moderate incomes by reducing their monthly premiums. They are available to those who purchase insurance through the Health Insurance Marketplace and are not offered an affordable, minimum-value employer plan.

Employees cannot receive both ICHRAs and Premium Tax Credits if they've been offered affordable coverage. If an employee is offered an ICHRA, they are considered to have been offered affordable coverage by their employer, which typically disqualifies them from receiving Premium Tax Credits. However, the affordability of an ICHRA is determined by specific criteria, including the employee's age and household income. If the ICHRA is deemed unaffordable under ACA guidelines, the employee may opt out of the ICHRA and instead qualify for Premium Tax Credits.

The interaction between ICHRAs and Premium Tax Credits can be confusing. As employers increasingly adopt ICHRAs, employees must navigate the complexities of choosing between ICHRA as an employer-sponsored benefit, vs potentially valuable tax credits. This intersection raises important questions about healthcare affordability and accessibility, and the future of healthcare benefits in the United States.

Understanding ICHRAs and Premium Tax Credits is essential not only for those directly involved — such as HR professionals, employers, and employees — but also for policymakers, healthcare providers, and insurers. As the healthcare sector continues to evolve, these mechanisms play a pivotal role in shaping the accessibility and affordability of health insurance, directly impacting the well-being and financial stability of millions of Americans.

Effect of ICHRAs on Premium Tax Credit eligibility

There are a couple main areas to consider here:

1. Eligibility Criteria: An employee offered an ICHRA is considered to have been offered affordable coverage by their employer, which typically disqualifies them from receiving Premium Tax Credits. However, the affordability of an ICHRA is determined by specific criteria, including the employee's age and household income.

2. Affordability Calculation: If the ICHRA is deemed unaffordable under ACA guidelines, the employee may opt out of the ICHRA and instead qualify for Premium Tax Credits. The affordability is assessed based on whether the remaining out-of-pocket cost (after the ICHRA contribution) for a self-only silver plan on the Marketplace exceeds a certain percentage of the employee's household income.

Working with an ICHRA provider like Thatch can help employers navigate these complexities and ensure that their ICHRA is compliant with ACA guidelines.

Choices for employees

Employees essentially have a few options:

1. Opting for ICHRA: Employees who find their ICHRA offer to be affordable and suitable might choose it over the Marketplace plan, foregoing the Premium Tax Credits. Their employee provides them with a healthcare stipend to purchase an individual health plan, and they can use the funds to pay for their premiums and other eligible medical expenses.

2. Opting for Premium Tax Credits: Conversely, if the ICHRA offer is not affordable, they might decline the ICHRA and use Premium Tax Credits to purchase a Marketplace plan instead. This option is only available to employees who are not offered an affordable, minimum-value employer plan.

How to help employees choose

This decision can be challenging, as employees must weigh the costs and benefits of each option. Employers can help employees make an informed decision by providing them with the necessary information and resources.

Ultimately it's challenging for employers to determine affordability requirements and help employees make the best decision. Working with an ICHRA provider like Thatch can help you navigate these complexities and ensure that your ICHRA is compliant with ACA guidelines.