With ICHRA, the tax status for employees’ portion of the premium payments depends on how their enrollment was executed – whether it was “on-exchange” or “off-exchange”. With on-exchange enrollments, the employees’ portion should be treated as a post-tax deduction, while with off-exchange enrollments it should be treated as pre-tax.
Some background:
On-exchange enrollments mean that employees were enrolled via the healthcare marketplace (either healthcare.gov or the state marketplace). Off-exchange enrollments mean that they were enrolled directly with the insurance carrier.
The regulatory reason for the different treatment is related to the Premium Tax Credits (PTCs) in the on-exchange context. With on-exchange enrollments, an individual could be eligible for and obtain PTCs and regulators were concerned about situations where employees would “double-dip” and obtain both a PTC and the employer ICHRA.
To discourage and minimize such situations, they decided that employee contributions for on-exchange enrollments would not be eligible for pre-tax status at all. They applied this rule even to cases where the employee is enrolled on-exchange but not receiving a PTC, just so that on-exchange enrollments would be discouraged from the get-go.
Important to note: The employer allowance and portion of the premium payment is always pre-tax. The different tax treatment applies only to employees’ portion, in the event that the plan they selected costs more than their employer allowance.
What this means for payroll:
When you run your payroll report, you will see a column titled “Plan market” on the right hand side (4th from the right). This column will indicate either “Off-exchange” or “On exchange” for each employee and enrollment record.
When you upload the data into your payroll system, you should set up those with “On-exchange” enrollments using a post-tax deduction code, and those with “Off-exchange” enrollments using a pre-tax deduction code.
For additional guidance on which deduction codes to use, you should reach out to your payroll system administrator.