In an April 5, 2022 statement, the Biden administration discussed its proposed regulations that address what is referred to as the “family glitch” in the ACA affordability regulations. The glitch the proposed regulations refer to is the inability of family members of employees eligible for employer-provided medical coverage to qualify for the ACA premium tax credit (PTC). While the coverage is affordable and meets the minimum value requirements for the employee-only coverage, the cost of the family coverage might be prohibitive.
World Observation – the affordability threshold is met if an individual can purchase a minimum value plan (one that offers “silver” level benefits or better) for a cost of no more than 9.61% (for 2022 as adjusted) of the individual’s household income. A minimum value plan pays, in the aggregate, 60% or more of the benefits under the plan (as opposed to out-of-pocket by the plan participants).
The current employer plan mandate for affordability applies to employers subject to the ACA mandate (those with 50 or more full-time employees or the equivalent). It requires such employers to offer coverage to the full-time employees and their dependents (children up to the age of 26) or be subject to penalties. However, the mandate only requires the employee-only coverage be affordable. The dependent coverage does not have to be affordable to avoid the potential penalties, and no coverage is required for employees’ spouses.
World Observation – The penalties for not offering affordable coverage are potentially asserted if an affected individual (the full-time employee in this case) is offered coverage that is not affordable and goes to an exchange and qualifies for a subsidy. In that case, the employer may be subject to a penalty of up to $4120 annually ($343.33 for each month) for each full-time employee not offered affordable coverage.
The current regulations would not provide a PTC for coverage on an ACA exchange for the family members of employees offered qualifying coverage. The new proposed regulation would expand the definition of affordability for PTC purposes, based on the cost of the family coverage under the employer plan rather than the employee-only cost. If the cost of the family coverage exceeds the 9.61% threshold, family members would be entitled to a PTC if they purchase coverage on an ACA exchange. The preamble to the regulations was clear. The proposed regulation would not mandate the employer provide that level of subsidy other than employee-only coverage, and only the affected family members would be eligible for the PTC.
World Observation - That sets up a possible ironic outcome. One driver of the employer calculation has been the realization employees’ dependents may not be eligible for PTCs on the ACA exchanges. Hence, employers made some effort to make their coverage affordable in a generic sense, even if not required. Since the dependents will now be eligible for the subsidies for the individual ACA coverage, there will be less pressure on employers to make their coverage affordable for dependents. It will be interesting to see how this unfolds. As for now, no action is needed from the employer.
The proposed regulation also made a similar change concerning whether a plan offers minimum value for purposes of the PTC. The new rule will permit the family members to qualify for a PTC if the employer plan does not offer minimum value to the family members. It is not as common for coverage to be differentiated in this way for family members. But those who might be in such a plan would also become eligible for a PTC. Again, as with the affordability changes, this would not require employers to alter the plan design.
Employers are not directly affected by this change (albeit they will need to pay attention to the issue via their Forms 1094 and 1095 reporting obligations) as there is no change to the employer mandates under the ACA. Employers will want to be attentive to the changes. Many may wish to communicate the change to their employees so that those affected can direct their dependents to look again at possible coverage on the ACA exchanges and qualify for PTCs.
Legal Update "Family GLitch" - fix finalized
The IRS recently issued its final regulation addressing the Family Glitch in the Affordable Care Act (ACA) subsidies for coverage on the ACA exchanges.
The Biden administration had previously expressed its intention to permit family members of individuals who had access to affordable, minimum value coverage from an employer to qualify for a subsidy on the exchange if that employer-provided coverage was not affordable for the family members.
New opportunities for new dependents
Effective January 1, 2023, determining whether a dependent of an employee covered under an employer plan has access to affordable coverage will determine whether that dependent is eligible for a subsidy under the federal ACA exchange. The affordability threshold is exceeded if the employer coverage cost is more than 9.12% (as adjusted for 2023) of the household income for employees and their family members, not just the employees. Since many employers have not made their coverage affordable for family members, the ability of those family members to obtain federal subsidies on the ACA exchange will be greatly expanded.
This change will not directly impact employer plans or their administration. There is no change to the mandate. Employer plans only need to be affordable for self-only coverage for full-time employees. However, since employers are required to file Forms 1094 &/or 1095 annually, they will want to be attentive to their plan details in this regard.
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