A common question is "will offering a standalone HRA in 2014 prevent employees from obtaining individual premium tax credits?" The answer is no. Employees who receive a standalone Health Reimbursement Arrangement (HRA) benefit can still access premium tax credits, as long as they meet other eligibility criteria based on household size and income. This is because an HRA does not consitute an "eligible employer-sponsored plan". In other words, offering a standalone HRA to employees does not disqualify them from the individual preminum tax credits.
What is the definition of an eligible employer-sponsored plan?
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 an HRA is not 1) a governmental plan, or 2) offered in the small or large group market within a State, so the HRA is not an "eligible employer-sponsored plan".
Note: If an employer offers an integrated HRA, an HRA combined with a qualified and affordable group health insurance plan, employees would not 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?
Starting in 2014, significant tax credits will be available to help individuals buy individual health insurance coverage through the new state health insurance marketplaces.
The tax credits will only be available to individuals who enroll through the state's INDIVIDUAL health insurance marketplace and are not already enrolled in an "eligible employer-sponsored plan".
If an employee is eligible for these tax credits, his or her cost of insurance will be capped at 2% - 9.5% of his or her household's income.
The tax credits are available for individuals and families who meet certain income requirements and do not have access to affordable health insurance through an "eligible employer-sponsored plan" or another government program.
For more details on eligibility and the credit amount see: What is my Individual Premium Tax Credit?
How Employers Can Tax Advantage of the Individual Premium Tax Credits
An employer can take advantage of these individual premium tax credit savings, and continue to offer employees a valuable health benefit, by offering a standalone HRA (also called a pure defined contribution plan). Then, employees purchase policies on the marketplace and access these individual premium tax credits. With this model, both the business and employees save a combined 50% on health insurance costs.
Also, since an HRA is not an "eligible employer-sponsored plan", a standalone HRA cannot satisfy the "play or pay" requirement (also called employer mandate or employer shared responsibility). However, this play or pay requirement is only applicable to businesses with 50+ full time equivalent employees. For businesses with less than 50 employees, a standalone HRA combined with the individual health insurance marketplace may be a no-brainer. Businesses with 50+ full time equivalent employees may find that choosing not to offer group health insurance, accepting applicable tax penalties and offering a standalone HRA provides cost-savings and value to the business and employees. Businesses with over 50 employees should simply conduct a cost analysis.
