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IRS Issues Proposed Regulations to Fix “Family Glitch”

On April 7, 2022, the IRS released proposed regulations intended to fix the Affordable Care Act’s “family glitch”.

The “family glitch” stems from 2013 guidance from the Treasury Department and the IRS. It essentially stated that a family’s eligibility for a marketplace premium subsidy is based on whether or not employer-sponsored insurance is affordable, with minimum value coverage for only the employee. That means the employee’s family members are not eligible for premium subsidies if the employee-only coverage is considered affordable. Under the ACA, employers have to offer coverage to some dependents, however, there is no requirement that employers contribute to that coverage.

Background

The Affordable Care Act (ACA) of 2010 requires applicable large employers (ALEs) to provide affordable minimum value coverage to full-time employees. Here are some key ACA definitions:

  • ALEs = employers with 50 or more full-time and full-time equivalent employees
  • Minimum value = plans that reimburse at least 60% of the total allowed costs of benefits
  • Affordable = employee's required contribution for self-only coverage does not exceed 9.5 percent (escalated annually, now at 9.61%) of the taxpayer’s household income for the taxable year

An employee who receives an affordable offer of coverage, from their employer, for a minimum value health plan is not eligible for premium subsidies in the Exchange/Marketplace. The dependent premium is not considered in the affordability calculation. While employers may provide affordable premium contributions for the employee's coverage, there is no requirement to do so for dependent coverage. In fact, many employers provide lower, or no, premium assistance for dependents.

Because affordability is based on employee-only coverage, and for many the dependent coverage portion is not affordable, dependents are not eligible for premium marketplace subsidies. With little or no premium assistance from the employer and a lack of eligibility for government premium assistance, many families may forgo health insurance coverage. Herein lies the “family glitch.”

The proposed regulations are an attempt to fix the “family glitch” by allowing an employee’s spouse or dependents to receive premium subsidies even if they are eligible for the employer’s group health plan. The proposed rule does not make any changes to the employee affordability rule. It only proposes a change to the affordability rule for related individuals. If finalized, the rule would not go into effect until January 1, 2023.

To keep the minimum value provision in line with the new affordability provision, the proposed rule extends the minimum value criteria for subsidy eligibility to include dependents. In this way, premium subsidies would now be available if the employer’s coverage offer does not meet the minimum value. Additionally, language is proposed to further clarify that plans must include “substantial inpatient hospital services and physician services” in order to meet minimum value.

What does this mean for employers?

The proposed rule does not add any new requirements for employers. Employers will still base ACA affordability on employee-only coverage (9.61% of household income for 2022). Employers are still not required to make employer contributions to dependent health care coverage. If an employer offers minimum value, and affordable coverage for their employee, the employee will still not be eligible for a premium subsidy. In this scenario, the proposed rule, if finalized, would only open premium subsidy eligibility for the employee’s spouse and dependents. Therefore, employers could see fewer dependent enrollments in their health plans.

What if an individual has multiple offers of coverage?

The proposed rule states that individuals with multiple offers of coverage from multiple employers are considered to have an affordable offer of coverage if at least one of the offers is affordable.

If you have any questions on this proposed rule, contact your OneDigital consultant.

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