ACA's 'family glitch' fix: What employers need to know
The proposed change would extend the ACA’s affordability measure beyond employee-only coverage to encompass all tiers of coverage.
Since it was enacted the Affordable Care Act (“ACA”) has measured whether coverage is affordable based on the cost of employee-only coverage. This has led to the creation of the “family glitch,” which has meant that spouses and dependent children of employees who are offered affordable, minimum value coverage have not been eligible for federal tax credits to purchase coverage through the exchange.
Related: HHS aims to increase health care access, affordability in proposed rule for 2023
As a result, spouses and dependent children might not receive any employer contribution towards health coverage, yet also not be eligible to receive a tax credit to purchase coverage. This has led many families to choose between paying more than they reasonably can afford for employer coverage, or going without coverage entirely. A recent proposal from the Internal Revenue Service (“IRS”) proposes to change this.
Current rule
The ACA requires Applicable Large Employers (ALEs) to offer health insurance to their full-time employees. This health coverage must meet the Minimum Essential Coverage (MEC) and Minimum Value (MV) requirements, and also be affordable. MEC must also be offered to dependent children — but this coverage does not need to be MV.
This may come as a surprise, but the ACA does not require coverage to be offered to spouses. Employers who don’t meet these requirements could be penalized.
In order for employers to ensure coverage is affordable, they must often contribute to that cost. However, since the affordability requirement only applies to coverage offered to the employee, employers are not required (at least by the ACA) to contribute towards the cost of coverage for spouses or dependents. Note that employers offering insured health plans must still comply with any minimum contributions required by their insurance carriers.
Proposed rule
The proposed change would extend the ACA’s affordability measure from being based solely on employee-only coverage, to being based on all tiers of coverage.
While employers now show affordable coverage if the employee’s contribution towards the lowest cost, employee-only coverage does not exceed 9.5% (as adjusted) of the employee’s household income; under the proposed rule, the employee’s contribution towards the lowest cost plan, for all other tiers of coverage, could also not exceed 9.5% (as adjusted) of household income.
Employees who are offered affordable, minimum value, employee-only coverage remain ineligible for federal subsidy assistance. However, if the other tiers of coverage that cover the employee’s spouse and/or dependent children are not also offered affordable coverage, those family members could now potentially become eligible for federal subsidy assistance, depending on overall household earnings.
To avoid creating another potential family glitch, the proposed regulations address minimum value coverage for an employee’s family members. As mentioned above, current ACA regulations only require that the employee be offered minimum value coverage. Spousal coverage is entirely optional, and a compliant health coverage offer to dependent children may be lower than minimum value.
The proposed regulations clarify that employee family member coverage must now comprehensively meet the minimum value standard.
Employer penalties
To the relief of employers, the proposed regulations do not expand employer mandate obligations or penalty risks. Employer penalties still hinge on whether the employee received a federal subsidy, not whether the spouse or dependent children received one. Effectively the new expanded affordability requirement only relates to federal tax subsidy eligibility.
Employee family members
The proposed rule also clarifies which family members are included for purposes of assessing whether coverage is affordable. Only the employee’s family for tax purposes would be included in determining whether coverage is affordable. This may exclude adult children who are still eligible under a parent’s employer plan, but are no longer a tax dependent. This could make determining affordability messy, as a dependent child’s age suddenly becomes a key consideration.
In addition, age is not the only factor to consider, since IRS rules for determining tax dependents are based on a number of factors. This means that a 19-year-old child of one employee may no longer be a tax dependent, while a 24-year-old child of another employee remains a tax dependent. Additional clarification on this would be welcomed.
Effective date
The proposed rules include a standard comment period and will then be reissued following agency review (possibly reflecting revisions). The IRS announced final regulations should arrive by year-end and become effective starting in 2023.
Although this requirement does not alter ACA’s current employer mandate structure, the rule shift is expected to complicate annual ACA reporting and raises the risk of potential reporting errors that could lead to reporting penalties. Employers should be aware of how these rules continue to evolve and may ultimately impact the employer’s processes.
Cory Jorbin, Esq., is chief compliance officer, West Region Employee Benefits for Hub International out of the Phoenix office. Cory provides day-to-day compliance support to account teams and clients of all sizes on ERISA, ACA, Cafeteria Plans, HIPAA, FMLA and related matters. He also actively presents nationally and locally (DirsuptHR Phoenix and Arizona SHRM State Conferences) on related topics before employer groups, professional associations, client meetings and on webinars.
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