Premium Tax Credit

If you're a small business owner trying to offer affordable health benefits, the Premium Tax Credit (PTC) might just be your secret weapon. It’s designed to help lower the cost of health insurance for employees, especially those purchasing coverage through the Health Insurance Marketplace. But how exactly does it work, and can your business benefit from it? Let’s break down everything you need to know about the Premium Tax Credit and how it impacts small businesses.

What is the Premium Tax Credit?

The Premium Tax Credit is a refundable credit designed to help eligible individuals and families afford health insurance purchased through the Health Insurance Marketplace. It was established under the Affordable Care Act (ACA) to make health coverage more accessible by reducing monthly premium costs.

In simple terms, the Premium Tax Credit is like a discount on health insurance premiums. It can either be applied upfront to lower the monthly cost or claimed when filing taxes to receive a refund.

How Does the Premium Tax Credit Work?

The Premium Tax Credit is based on:

• Household Income: Typically between 100% and 400% of the federal poverty level.
• Household Size: More dependents usually mean higher credit eligibility.
• Location: Health insurance costs vary by state, affecting the credit amount.
• Age of Enrollees: Older individuals generally receive a higher credit because of higher premiums.

If an employee is eligible, they can choose to:

• Apply the credit in advance, which directly lowers monthly premiums, or
• Receive it as a lump sum when filing their federal tax return.

Who is Eligible for the Premium Tax Credit?

To qualify for the Premium Tax Credit, an individual must:

• Purchase health insurance through the Health Insurance Marketplace.
• Have a household income between 100% and 400% of the federal poverty level.
• Not be eligible for other qualifying coverage, such as Medicaid, Medicare, or employer-sponsored health insurance that is deemed affordable and provides minimum value.
• File a joint tax return if married.

For Small Business Owners: If your employees purchase insurance through the Marketplace and meet the eligibility criteria, they might qualify for the Premium Tax Credit, potentially lowering their monthly premiums.

Can Small Businesses Benefit from the Premium Tax Credit?

While the Premium Tax Credit is aimed at individuals and families, it indirectly benefits small businesses in several ways:

• Lower Employee Premiums: Employees who qualify for the credit will pay less for their Marketplace health insurance.
• Cost Control: Small businesses using an Individual Coverage Health Reimbursement Arrangement (ICHRA) can reimburse employees for premiums, leveraging the Premium Tax Credit to reduce their own costs.
• Flexible Benefits Offering: Small businesses that can’t afford traditional group health insurance can use ICHRA to provide a health benefit without managing a group plan.

Premium Tax Credit and ICHRA: A Perfect Match

ICHRA (Individual Coverage Health Reimbursement Arrangement) allows employers to reimburse employees for individual health insurance premiums and out-of-pocket medical expenses tax-free. But how does it interact with the Premium Tax Credit?

• If an employee is offered an ICHRA, they must decide whether to accept it or opt for the Premium Tax Credit.
• An ICHRA is considered “affordable” if the employee's required contribution is below 9.12% of their household income (2025 threshold).
• If the ICHRA is deemed affordable, the employee cannot claim the Premium Tax Credit.
• If the ICHRA is not affordable, the employee can decline it and receive the Premium Tax Credit, but they lose the ICHRA benefit.

Simply put, the Premium Tax Credit and ICHRA can’t be combined, but they can be strategically used to maximize benefits for employees while controlling costs for employers.

How to Report and Claim the Premium Tax Credit

Employees who receive the Premium Tax Credit must:

• File Form 8962 (Premium Tax Credit) with their federal tax return.
• Reconcile any advance payments received with their actual annual income.
• Report any changes in income, household size, or employment status to the Health Insurance Marketplace to avoid overpayments or underpayments.

For Employers Using ICHRA: It’s crucial to communicate the impact of accepting the ICHRA on the employee’s Premium Tax Credit eligibility to avoid confusion and ensure compliance.

Advantages of the Premium Tax Credit for Small Businesses

The Premium Tax Credit offers several benefits to small businesses, including:

• Cost Savings: Employees who qualify for the credit pay less for their health insurance, which can allow small businesses to allocate their budget more efficiently.
• Attract and Retain Talent: Offering an ICHRA in combination with the Premium Tax Credit helps small businesses compete with larger companies by providing flexible, affordable health benefits.
• Tax Advantages: Employers using an ICHRA can reimburse employees tax-free, reducing payroll tax liabilities.

How SimplyHRA Simplifies Premium Tax Credit and ICHRA Management

At SimplyHRA, we understand that navigating the Premium Tax Credit and ICHRA rules can be confusing. That’s why we’re here to make it simple for small businesses to offer flexible, affordable health benefits.

• Set Up in Minutes: Our platform allows you to set up an ICHRA plan in minutes, with full compliance and enrollment support.
• Cost Control and Predictability: Set your own budget without worrying about surprise premium hikes.
• Employee Choice: Your employees get the freedom to choose the health plan that works best for them, potentially qualifying for the Premium Tax Credit.
• Hassle-Free Compliance: We handle all the paperwork, so you don’t have to.

Ready to make health benefits easy and affordable for your small business? Sign up for an employer account or Schedule a demo to see how SimplyHRA can work for you!

Frequently Asked Questions (FAQs) about Premium Tax Credit:

Q: Can small business owners qualify for the Premium Tax Credit if they purchase health insurance through the Marketplace?

A: Yes, small business owners can qualify for the Premium Tax Credit if they purchase individual health insurance through the Health Insurance Marketplace and meet the income and eligibility requirements. However, if they offer an ICHRA to their employees, they themselves are not eligible for the Premium Tax Credit for their personal insurance coverage.

Q: Does the Premium Tax Credit affect other tax benefits for small businesses?

A: No, the Premium Tax Credit is a personal tax credit for individuals and does not directly impact other tax benefits or deductions available to small businesses, such as the Small Business Health Care Tax Credit or other business expense deductions.

Q: Can employees still get the Premium Tax Credit if their employer offers an ICHRA?

A: Employees can only receive the Premium Tax Credit if the ICHRA offered by their employer is deemed unaffordable based on their income. If the ICHRA is affordable, they are not eligible for the Premium Tax Credit. Employees must also decline the ICHRA to receive the Premium Tax Credit.

Q: How is the Premium Tax Credit calculated for employees with fluctuating incomes?

A: The Premium Tax Credit is calculated based on projected annual income, but if an employee's income fluctuates, they may receive more or less credit than they are eligible for. They must reconcile this on their federal tax return using Form 8962. Reporting income changes to the Marketplace throughout the year can help avoid repayment or underpayment issues.

Q: Are there penalties for incorrectly claiming the Premium Tax Credit?

A: Yes, if an individual receives more Premium Tax Credit than they are eligible for due to underestimating their income, they will need to repay the excess amount when they file their federal tax return. Accurate income reporting and timely updates to the Marketplace can help avoid this.

Q: Can dependents receive the Premium Tax Credit?

A: Dependents cannot receive the Premium Tax Credit on their own. However, if they are included in the household's tax filing and health insurance plan, the household’s Premium Tax Credit calculation will include them as part of the total eligible members.

Q: Is the Premium Tax Credit available for all types of health insurance plans?

A: No, the Premium Tax Credit is only available for health insurance plans purchased through the Health Insurance Marketplace. It cannot be used for short-term health plans, employer-sponsored plans, or off-Marketplace plans.

Q: What happens to the Premium Tax Credit if an employee's circumstances change mid-year?

A: If an employee's income, household size, or other eligibility factors change mid-year, they should update their information with the Health Insurance Marketplace. This ensures the Premium Tax Credit is adjusted accordingly, preventing overpayment or underpayment when they file their tax return.

Q: Can an employee switch from the Premium Tax Credit to an employer’s ICHRA mid-year?

A: Yes, but they will need to report the change to the Marketplace and may have to repay part of the Premium Tax Credit received earlier in the year if the ICHRA is deemed affordable. Coordination with the employer is recommended for a smooth transition.

Q: How does the Premium Tax Credit interact with Medicaid eligibility?

A: If an employee becomes eligible for Medicaid mid-year, they are no longer eligible for the Premium Tax Credit. They should cancel their Marketplace coverage and Premium Tax Credit to avoid repayment when filing their tax return.