Summary: The IRS recently released a final rule correcting the ACA “family glitch” beginning in 2023. The final rule allows family members of employees to be eligible for financial assistance to enroll in marketplace Exchange plans if the cost of job-based family medical coverage is considered unaffordable by IRS standards. While this final rule has minimal impact on employers’ ACA affordability and reporting considerations, the IRS released related guidance permitting certain cafeteria plan election changes. Read on for more information.
On October 11, 2022, the Internal Revenue Service (IRS) issued a final rule correcting the so-called “family glitch” under the Affordable Care Act (ACA) for 2023. The final rule changes the eligibility standards for an Affordable Care Act (ACA) premium tax credit (PTC) based on the affordability of health plan coverage for family members of employees who are offered coverage by their employers.
Click here for a prior Risk Strategies article detailing the “family glitch” proposed rule, first issued by the IRS in April 2022. The final rule largely adopts most of the proposed rule provisions, including greater access to PTCs for family members of employees eligible for employer-sponsored coverage. As a result, more of these family members are anticipated to become eligible for financial assistance through a PTC in marketplace Exchange plans for 2023. The marketplace Exchange open enrollment period for 2023 is November 1, 2022, to January 15, 2023.
In the most significant administrative action to the ACA since its enactment, the White House estimates the “family glitch” correction final rule will result in new or more affordable coverage for nearly 1 million Americans.
ACA Affordability Background
The ACA created PTCs for individuals who enroll in a qualified health plan through a marketplace Exchange. However, an individual is not eligible for a PTC if they are eligible for affordable, minimum value coverage under an employer-sponsored health plan. Affordability under employer-sponsored health plans is determined by ensuring the required employee contribution for self-only coverage does not exceed a certain percentage of the employee’s household income — 9.61% for the 2022 plan year and 9.12% for the 2023 plan year. Minimum value coverage is determined by ensuring that the plan's share of the total allowed costs of benefits provided to the employee must be at least 60 percent and the plan must provide substantial coverage of inpatient hospital and physician services.
The current ACA affordability determination provides that if self-only minimum value coverage under an employer-sponsored plan is affordable for an employee (and only the employee), then it’s also considered affordable for an employee’s spouse (if taxes are filed jointly) and any tax dependents of the employee who are eligible to enroll in the employer-sponsored health plan. This current interpretation of the ACA affordability standards results in a so called “family glitch”, an obscure issue buried deep in the ACA’s law language, where the spouse and tax dependents of an employee are not eligible for PTCs if the coverage offered to that employee by their employer is considered affordable based on self-only coverage but still not affordable on a family household income basis.
IRS Final Rule to Correct “Family Glitch”
Affordability Determination Change
The final rule corrects the “family glitch” and provides a separate affordability test in 2023 for an employee’s family members based on the cost to the employee for family coverage. If the family coverage cost doesn’t meet the statutory affordability standard, an employee’s family members could be eligible for PTCs, even if the employee is not eligible for a PTC based on their own affordable offer of self-only coverage by their employer.
Minimum Value Plan For Family Members
In addition to the affordability determination change, the final rule also adds a minimum value rule for family members of employees based on the benefits provided to the family members. The current minimum value standard for employees would still hold. To be considered a minimum value plan, the plan’s share of the total allowed costs of benefits provided to the employee must be at least 60 percent and the plan must provide substantial coverage of inpatient hospital services and physician services. The final adopts a separate minimum value test for family members, requiring the plan’s share of total allowed costs of benefits provided to family members to be at least 60 percent as well as providing substantial coverage of inpatient hospital and physician services.
Family Member
Under the final rule, the affordability determination calculation only applies to “family members” of the employee, meaning the employee’s spouse (filing a joint return with the employee) and/or the employee’s tax dependents, such as children.
An adult child who is no longer a tax dependent of the employee is not included in the calculation; and that child may enroll in employer-sponsored coverage and also be eligible for a PTC for their own individual coverage.
Spousal Coverage
In instances where an employee’s offer of family coverage is unaffordable for the employee’s spouse but the spouse is offered affordable coverage under their own employer-sponsored plan, the final rule confirms that the spouse is not eligible for a PTC through a marketplace Exchange plan.
ICHRA
The final rule does not address the affordability rules for Individual Coverage Health Reimbursement Accounts (ICHRAs). However, the IRS confirmed in the final rule that it will work with the Department of Labor and the Department of Health and Human Services to issue future guidance regarding ICHRAs and affordability.
Impact To Employers
ACA Employer Mandate
The IRS confirmed the final rule will not affect the ACA employer mandate rules and liability since the employer mandate requires certain large employers to offer coverage to employees and family member dependents. However, penalties for violating the employer mandate are triggered only when an employee receives a PTC through the marketplace Exchange, rather than the employee’s family members receiving a PTC. The final rule extends PTCs to only the family members of employees who are not offered affordable, minimum value employer-sponsored family coverage, but does not affect the eligibility of employees. It does not change the current employer obligation for affordable, minimum value self-only coverage; it simply provides employees’ family members a more affordable option through PTCs if employer-sponsored coverage is not affordable or does not provide minimum value. Further, the final rule does not change the ACA affordability calculations for employees or the ACA affordability safe harbors. In more welcome relief for employers, the IRS also confirmed that the final rule does not affect current ACA reporting requirements nor impose new reporting requirements.
However, employers may wish to inform and educate their employees on this affordability change for family members and their additional coverage options. The IRS will be dedicating resources to upcoming education and outreach efforts for consumers as well as employers. Employers are advised to watch out for more information in this space to share with employees.
Cafeteria Plan Guidance
This IRS issued Notice 2022-41 to address a potential conflict between the final rule and cafeteria plan guidance. Notice 2022-41 permits, but does not require, an employer to allow an employee, their spouse, and dependent children to drop family group health coverage[1] mid-year to enroll in a marketplace plan during the marketplace open enrollment period in accordance with the final rule. The cafeteria plan may rely on the reasonable representation of an employee that the employee, their spouse, and dependent children, as applicable, have enrolled or intend to enroll in a marketplace plan, effective immediately after their cafeteria plan coverage ends.
For those employers choosing to adopt this permitted cafeteria plan change, employers must amend their cafeteria plan documents by the last day of the plan year. The amendment may be effective retroactively to the first day of that plan year as long as the plan operates in accordance with the Notice guidance and the employer sufficiently informs plan participants of this permitted change. However, the amendment cannot permit an election to drop coverage on a retroactive basis.
Financial Impact
From an underwriting and financial perspective, it is too early to speculate the effects that the final rule will have on employer-sponsored plan coverage. In the final rule preamble, the IRS states it does not expect the final rule to have a meaningful impact on premiums for employer coverage nor does it expect that employers will discontinue offering or contributing to family coverage, generally. They do note that some employees may shift from family coverage to self-only coverage when their family members become newly eligible for the PTC; but only when it is advantageous for those family members to shift, based on personal and family circumstances. This shift could lead to a small decrease in plan participant headcount and total health coverage spending as well as minimal tax consequences with respect to a decrease in the employer exclusion for those individuals who drop employer coverage.
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[1] Group health plan here does not include a health Flexible Spending Account (FSA)
