Fixing the “Family Glitch” in the ACA

Under the ACA, people who do not have access to “affordable” health insurance through their employer may qualify for a premium tax credit to purchase coverage through the ACA’s health insurance marketplaces (CoveredCA in California). Current regulations define employer-based health insurance as “affordable” based solely on the lowest cost plan’s employee contribution, not on the full contribution to insure their family members. This has the consequence of deeming family members ineligible for premium tax credits, even though the cost of employer-sponsored coverage for family members could be well above the affordability threshold. This problem has been dubbed the “family glitch.”

Final Regulations Released

The Treasury Department and the IRS released proposed regulations in April to eliminate the family glitch. Those regulations have just been finalized. The new regulations allow family members of workers who are offered affordable self-only coverage, but unaffordable family coverage would no longer be disqualified from receiving premium tax credits to purchase ACA coverage.

Are we surprised by this?

No. This change is not a surprise. The regulations flow from an executive order on the ACA and Medicaid issued by President Biden in January 2021, which hinted at the possibility of fixing the family glitch. Critics have long argued that the family glitch interpretation is inconsistent with the text, structure, and goals of the ACA and unfairly penalizes family members of lower-income workers. In addition, it has long been the intention of the current administration to beef up the ACA where possible, with the goal of providing greater access to healthcare and to lower individuals’ costs were possible.

Fixing the Family Glitch

The proposed rule would reinterpret how affordability of employer health care coverage is determined for purposes of premium tax credits with respect to family members who are offered employer-sponsored coverage.

The Old Way: Employer coverage is defined as unaffordable for a single employee if the employee contribution for self-only coverage is more than the affordability threshold (9.61% in 2022 of household income, 9.12% in 2023). An oddity emerges in that calculation with respect to family coverage because affordability for family members is also determined with respect to the contribution for self-only coverage (not the contribution for family coverage).

The New Way: The affordability test for single employees will remain unchanged. Employees would still be barred from accessing marketplace subsidies if their employer offered affordable employee-only coverage. However, the calculation will change for employees with families. Under the new rules, affordability would be calculated separately for family coverage and would be deemed unaffordable for family members if the required family contribution is greater than the affordability threshold (9.61% of household income in 2022, 9.12% in 2023). When this affordability threshold is exceeded, family members would no longer be barred from accessing premium tax credits and thus could seek subsidized coverage through the Exchange.

Key Employer Takeaways

There is a lot in here . . . What do I really need to know as an employer? The good news is that there is little that is newly actionable for employers in these proposed regulations. It impacts access to premium tax credits for dependents who may have been previously disqualified. The following are the key takeaways for employers:

No Impact to Employer Shared Responsibility Penalties: The proposed rule will not affect Shared Responsibility liability under the employer mandate. Why? The employer mandate requires certain ALEs to offer coverage to employees and dependents. However, penalties for violating the mandate are triggered only when an employee receives premium tax credits through the marketplace. Therefore, extending marketplace tax credits to family members of employees (who are not offered affordable employer-sponsored family coverage) would not impact the eligibility of employees and thus would not trigger a shared responsibility payment.

No Impact to 1095 Reporting: These regulations have no impact on 1095 reporting. It is important to remember that affordability and minimum value for premium tax credit eligibility is different than for purposes of potential employer shared responsibility penalties. No doubt the new proposed rule will create some confusion given the similar terminology. However, the regulations do not change the affordability calculation or minimum value determination as it relates to annual ACA reporting or assessment of penalties.

Conforming Cafeteria Plan Change: A change was also made to allow an employee to make a mid-year election change to their health insurance coverage (not FSA coverage) when a dependent becomes newly eligible for a premium subsidy under the Exchange.

Marketplace Notice: Employers can expect the standard Marketplace Notice to be revised to reflect these changes and should plan on updating the version that is distributed to employees once a new version has been released.

Two Nitty Gritty Clarifications

The regulations also addressed two additional items as follows:
  1. Minimum Value Rule: The minimum value rule is extended to dependent coverage. This means that employers must provide an offer of minimum value coverage to dependent children as well as to employees (to avoid Shared Responsibility penalties). The definition of minimum value coverage retains the requirement that plans provide 60% of the total allowed cost of benefits and newly adds the clarification that plan benefits must include substantial coverage of inpatient hospital and physician services. To the extent that minimum value coverage is not being offered to dependent children, employers will need to address this issue.
  2. Marketplace Responsibilities: The marketplace would be required to assess:
    • Whether an employee has an offer of affordable employee-only coverage,
    • Whether family members have an offer of affordable family coverage, and
    • Whether any of those family members have an offer of affordable coverage from more than one employer (either as an employee or a dependent).

What is the effective date?

The new rule becomes effective for tax years beginning in 2023. This means that dependents who are offered unaffordable employer-sponsored family coverage would be eligible for premium tax credits beginning in 2023 (with enrollment to begin in November 2022).
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