IRS Fixes ACA Family Glitch
On October 11, 2022, the Internal Revenue Service (IRS) issued a Final Rule to fix the Family Glitch.
The document contains final regulations under §36B of the Internal Revenue Code (IRC) that amend the regulations regarding eligibility for the premium tax credit (PTC) to provide that affordability of employer-sponsored minimum essential coverage (MEC) for family members of an employee is determined based on the employee’s share of the cost of covering the employee and those family members, not the cost of covering only the employee. The final regulations also add a minimum value rule for family members of employees based on the benefits provided to the family members. The final regulations affect taxpayers who enroll, or enroll a family member, in individual health insurance coverage through a Health Insurance Exchange (“Exchange”) and who may be allowed a PTC for the coverage. These final regulations are effective on December 12, 2022 and will affect enrollment in health plans as of January 1, 2023.
What is the Family Glitch?
Under the previous interpretation of the regulations, individuals did not qualify for a PTC if they were eligible for other MEC. The IRS previously decided that an employer’s offer of coverage is “affordable” based upon the cost of employee-only rather than family coverage. Therefore, if the employee is offered affordable employee-only coverage, all family members are ineligible for the PTC. This is true even if the family coverage exceeds 9.12% of household income, as the cost of family coverage was not considered in determining family member’s affordability of the coverage. This is known as the Family Glitch.
The Final Rule
The final rule clarifies: 1) that the affordability test for family members is to be based on the cost of family (rather than employee-only) coverage; 2) the minimum value rule for family coverage; and 3) the treatment of rebates for purposes of PTC eligibility. The “affordable” and “minimum value” tests are changed only as they relate to family (but not employee-only) coverage. The final rule does not affect the affordability test for employees, which remains unchanged. Employees remain barred from marketplace subsidies if their job offers affordable employee-only coverage, but their family members may be newly eligible. The final rule includes several new examples of how these the changes apply, as well as a severability clause.
- Affordability for Family Coverage
The final rule adopts a new, separate test for family members based upon the employee’s cost towards family coverage. Family coverage is any coverage other than employee-only coverage. An offer of job-based employer sponsored group coverage is considered affordable for family members if the portion of the annual premium that an employee must pay for family coverage is less than 9.5% of the household income. Note: for 2023 the employee only coverage is affordable if the cost the employee must pay for employee only coverage is less than 9.12% of household income. However, the final rule did not lower the existing 9.5% of household income for the cost of family coverage in determining the family affordability. Please note even though the final rule states 9.5% for Family coverage affordability test, we believe the intent was for the family coverage percent to be the same as employee only coverage (9.12%). Further guidance from the IRS is anticipated. In the meantime employers we believe employers can rely on the final rule.
Family members are those claimed as the employee’s tax family, e.g., the employee, spouse and any dependent children. Dependent children covered up to age 26 that are not tax dependents of the employee, even if covered under the family coverage, are not considered in the affordability test for family coverage and these dependents will remain under the employee-only affordability test and not eligible for a PTC if the coverage is deemed affordable.
If an individual is offered coverage (employee-only) or family by multiple employers, and if only one of those offers is deemed affordable, the individual/family will be barred from a PTC, as illustrated in examples 5 and 6 in the final rule.
- Minimum Value for Family Coverage
The final rule creates a separate test for minimum value: one for employees and one for family members. Although these two tests are essentially the same, the final rule kept the employee minimum value rule in place and applied the same rule separately to family members. These separate tests are:
- For employees: under the current minimum value standard for employees, the plan will provide minimum value for the employee only if the share of total allowed costs of benefits is at least 60% and the plan provides substantial coverage of inpatient hospital and physician services.
- For family members: a plan will provide minimum value for family members if the share of the total allowed costs of benefits provided to the family member is at least 60% and the plan provides substantial coverage of inpatient hospital and physicians services.
- Premium Refunds
The final rule addresses how a premium refund (i.e., medical loss ratio rebate) owed due to the prior year’s coverage will affect PTCs for an individual. Refunds for prior years should not count against the amount an enrollee currently receives as PTCs. This provision was adopted from the proposed ruling and remains unchanged.
Effect on other Employer-Sponsored Benefit Plans
Section 125 Cafeteria Plans
The IRS issued a new notice (Notice 2022-41) that clarifies employees, spouses and dependents can discontinue their employer coverage (if other than self-only group health plan coverage) during a plan year and allow family members to enroll in subsidized marketplace coverage and make new elections under their respective Section 125 plan effective on or after January 1, 2023 under the Change in Status rules of the Section 125 plan.
In addition to the current Change in Status rules allowing non-calendar year plan election changes, a non-calendar year plan may allow an employee to revoke, on a prospective basis, an election of family coverage under a group health plan that is not a Healthcare FSA and that provides MEC if the following conditions are met:
- One or more related individuals are eligible for a special enrollment period in a Qualified Health Plan (QHP) through an Exchange, or one or more already-covered related individuals seek to enroll in a QHP during an Exchange’s annual open enrollment period (November 1 through January 15); and
- The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the related individual or related individuals in a QHP through an Exchange for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked. If the employee does not enroll or is not eligible to enroll in a QHP through an Exchange, the employee must elect self-only coverage (or family coverage including one or more or the already-covered related individuals) under the group health plan.
The employer with the Section 125 plan may rely on the reasonable representation of an employee that the employee and/or related individuals have enrolled or intend to enroll in a QHP through an Exchange for the new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.
Effective Date and Section 125 Cafeteria Plan Amendments
This guidance is in effect for elections made on or after January 1, 2023. To allow the new permitted election changes under this notice, an employer must amend a Section 125 plan to provide for these election changes, if such amendment is applicable. An employer must adopt the amendment on or before the last day of the plan year in which the elections are allowed, and the amendment may be effective retroactively to the first day of the plan year, provided that the Section 125 plan operates in accordance with the guidance under this notice, and the employer informs participants of the amendment, and provided further that an employer may amend a Section 125 plan to adopt the new permitted election changes for a plan year that begins in 2023 at any time on or before the last day of the plan year than ends in 2024. However, in no event may an employer amend a Section 125 plan to allow an election to revoke coverage on a retroactive basis.
BASIC has updated plan documents and prepared amendments. BASIC clients will receive communication on how to download and distribute these amendments soon.
Individual Coverage Health Reimbursement Arrangements (ICHRAs)
The final rule does not revise the affordability rules for ICHRAs. Under the current rules in effect, a family member who can be covered under an ICHRA generally does not qualify for a PTC if the ICHRA offer is affordable, or the employee takes advantage of the ICHRA (even if unaffordable). A family member may, however, be eligible for PTC if they are not eligible for coverage through the ICHRA.
Nothing will change related to the Affordable Care Act’s (ACA) employer reporting or offer of coverage mandate. Applicable Large Employers (ALEs) will still have to provide affordable, minimum-value coverage to their full-time or full-time equivalent employees, and offer coverage to those employees’ dependents (offering coverage to spouses is optional). Although the employer must offer coverage to an employee’s dependents, there is no requirement to pay for dependent coverage. The employer mandate penalty is only triggered if an employee’s coverage is unaffordable and they receive a PTC in the marketplace. There is no mechanism for triggering the penalty based on an employee’s family members receiving PTCs in the marketplace.
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