Premium Tax Credit vs. BASE® HRA

Small business owners have so much more to think about in the age of the Affordable Care Act. Understanding all of the rules and regulations is just half the battle, and then business owners are left to choose the right solutions to comply with market reforms. One example of this is the Premium Tax Credit. Many self-employed business owners have heard of it, and then they must understand it and apply all of that knowledge in making a choice that is more suitable to their situation. One example of this is not only knowing the difference between the Premium Tax Credit and Section 105 HRA, but also knowing which deduction could provide more savings.

WHAT IS IT?

HRA

The Section 105 BASE® Health Reimbursement Arrangement is an IRS-approved tax savings plan available to small business owners that are classified as sole proprietors, partnerships, or C or S Corporations. This plan is especially applicable to small business owners that can legitimately hire their spouse, yet it can also be applied in other situations. Each type of small business has its own rules regarding Health Reimbursement Arrangements.

Premium Tax Credit

The Premium Tax Credit is the amount of subsidy an individual may be qualified for to assist them in the cost of health insurance.

ELIGIBILITY

HRA

BASE® HRA with 1 Employee Participant

• Health Insurance Premiums can be reimbursed. However, premium reimbursement will make your qualified employee ineligible for a premium tax credit.
• Supplemental Premiums that qualify as indemnity policies
• Dental Premiums, Vision Premiums, Long Term Care Insurance Premiums, Medicare Premiums
• All other 213(d) medical expenses
• Plan must have a benefit limit (plan maximum)

Premium Tax Credit

All of the following must be met in order to qualify for the premium tax credit:

• Buy health insurance through the Marketplace
• You can’t be eligible for coverage through an employer or government health insurance plan.
• Your income also must be within a certain range to qualify.
• You cannot be claimed as a dependent by another person.
• If you’re married, you and your spouse must file a joint tax return.
• Are ineligible for health coverage through an employer/government plan.

Note: Changes in income and family size may affect eligibility.

SAVINGS

So which solution will save more money, the BASE® HRA member benefit or the Premium Tax Credit?

BASE® HRA vs. Premium Tax Credit Example

Individual Premium = $500 per month

Household Subsidy = $100 per month

In this example the HRA would save $918 more than the Premium Tax Credit. The Section 105 BASE® HRA virtually guarantees that the premium can always be tax deductible for the business. Keep in mind that household income fluctuates each and every year. If the business or household has a higher earning year (business expenses go down, crop prices go up, etc.) the subsidy will be owed back on the personal taxes, thus they would lose the subsidy.

CLAIMING THE DEDUCTION

HRA

First you would qualify and enroll in the BASE® HRA, which is an Alliance member benefit. Once a plan is established, BASE® provides clients with the necessary documentation needed to deduct up to 100% of family medical expenses. The HRA allows business owners to go beyond the standard 1040 deduction, and allows them to claim health care expenses as a deduction on their business tax return. This now makes health care expenses deductible from a federal, state and self-employment tax standpoint.

Premium Tax Credit

It depends on how you chose to receive the tax credit.

• If you chose to receive the tax credit in advance (to reduce the cost of insurance), it will be subtracted from the credit calculated on your return. The plus side to this method is that if you received the credit in advance and it ends up to be less than what you were eligible for, you will reduce what you owe or receive more of a refund at tax time. The down side of this method is that you could receive more of a credit than you deserved, which would mean you would have to pay the IRS back.
• If you chose to wait until tax time, then you would calculate the amount you owe and it would either lower the amount you owe Uncle Sam or increase the amount of your refund.

QUESTIONS

Still are not sure? Here are some questions that might help you decide which is more advantageous for you and your business situation:

Q: Can Marketplace Premiums be reimbursed in an HRA?

A: Yes, for plan designs with only one qualified employee.

Q: Why does BASE® recommend not reimbursing premiums where an employee obtains a subsidy?

A: The reimbursement of a Marketplace policy makes an employee ineligible for the Premium Tax Credit.

Q: Can I have a Marketplace policy, obtain the Premium Tax Credit and still use the BASE® HRA?

A: Yes. Your plan will be designed to reimburse Long Term Care premiums, Dental and Vision premiums, Supplemental Premiums and noninsured medical expenses. Health Insurance Premiums will not be able to be included.

Each situation is different and circumstances change, but make sure you are armed with the knowledge to make the choice that is right for you. You can learn if you qualify for the Alliance Tax Savings Program and receive an analysis on whether the premium tax credit or the HRA deduction is more beneficial – click here.