On October 11, 2022, the IRS issued final regulations to fix the so-called “family glitch” loophole in the Affordable Care Act (ACA). The family glitch results from an ACA provision that makes families who are deemed to be eligible for “affordable” employer-provided health coverage ineligible for premium tax credits (PTCs) if they enroll in ACA exchange coverage; however, the law based the affordability determination on the premium cost for self-only coverage and therefore didn’t reflect the additional costs of covering family members. In addition, the IRS issued Notice 2022-41, which clarifies that employees, spouses and dependents can transition from employer-sponsored health coverage to subsidized exchange coverage midyear if the employer plan sponsor amends its non-calendar-year cafeteria plan to allow for such changes.
An individual is only eligible for subsidies on the ACA exchange if he or she does not have access to affordable employer-sponsored health insurance. Since 2014, the affordability of health coverage has been based on the cost of the employee’s individual coverage, not factoring in the higher cost of covering additional family members. So, when an individual has access to affordable employee-only coverage, both the employee and the employee’s family members become ineligible for subsidized exchange coverage.
To fix this “family glitch” loophole, beginning in 2023, affordability of employer-sponsored coverage for an employee’s family members will be based on the employee’s cost to cover the employee and those family members, rather than the cost to cover just the employee. Specifically, employer-provided coverage will be considered affordable for an employee’s family members if the cost of family coverage does not exceed 9.5% (as adjusted) of household income.
For the affordability calculations, “family members” are those in the employee’s tax family (i.e., the employee, a spouse filing joint taxes or a dependent). Other family members (such as adult children up to age 26) might be offered job-based coverage through the employee’s employer. But, if they are no longer a dependent on the employee’s tax return, they are not included in the affordability calculations.
The new affordability requirements only apply to a family member’s ability to receive a subsidy on the ACA exchange. If a family member of an employee does receive a subsidy, the employee’s employer faces no penalty. This is because the final regulations do not change the ACA employer mandate, which provides that applicable large employers (those with 50 or more full-time and full-time equivalent employees) must offer minimum essential health coverage that is affordable and meets minimum value to employees and their dependents, or pay a penalty if an employee receives a PTC for ACA exchange coverage. With respect to family members, an employer-sponsored plan is considered to provide minimum value only if the plan’s share of the total allowed costs of benefits provided to family members is at least 60%, and the plan benefits include substantial coverage of inpatient hospital services and physician services. For purposes of determining whether applicable large employers offer affordable minimum essential coverage to their employees, employers may continue using the available safe harbors (Form W-2, rate of pay and federal poverty level).
Although the regulations do not directly affect employer plan sponsors, there are some potential indirect impacts. For example, an employee’s family members may opt to forego the employer-provided coverage for subsidized ACA exchange coverage; however, if an employee’s family members decide to purchase health coverage on the ACA exchange while the employee stays with the employer-provided plan, the family would have multiple deductibles and maximum out-of-pocket limits for this type of “split coverage,” potentially increasing total out-of-pocket costs. In addition, families might prefer the benefits and provider networks of employer coverage compared with ACA exchange coverage. As the 2023 coverage year approaches, employers might want to communicate to their employees about their available options.
The IRS guidance in Notice 2022-41 allows participants in non-calendar-year cafeteria plans to change their family coverage in an employer-sponsored group health plan to allow one or more family members to enroll in a subsidized plan on the ACA exchange (i.e., a qualified health plan [QHP]). Employers can choose to amend non-calendar-year cafeteria plans to allow for these midyear election changes if both the following conditions are met:
The guidance applies to elections effective on or after January 1, 2023. Amendments must be adopted on or before the last day of the plan year in which the changes are allowed and may be effective retroactively to the first day of that plan year if the plan operates according with the guidance and participants are informed of the amendment. An employer may amend a cafeteria plan to adopt the election changes for a plan year that begins in 2023 at any time on or before the last day of the plan year that begins in 2024.
| Title | File Type | File Size |
|---|---|---|
| Insider October 2022 | .1 MB |
