Compliance News | December 23, 2022
Effective January 1, 2023, final IRS regulations eliminate the so-called “family glitch” under the Affordable Care Act by allowing the premium tax credit (PTC) for family coverage on the federal health insurance Marketplace or a state Exchange (Exchange) to be based on the employee’s cost of family coverage under the group health plan, rather than the cost of employee-only coverage. The regulations also provide a new minimum value rule for the employee’s spouse and dependents (related individuals) under which plans need to ensure that they provide 60 percent minimum value coverage to related individuals.
In conjunction with the final regulations, the IRS established a new status-change event, which allows participants to revoke family coverage to allow one or more related individuals to enroll in a health insurance plan on an Exchange.
The “family glitch” refers to a 2013 interpretation of the ACA that based eligibility for a family's premium subsidies on whether available employer-sponsored insurance is affordable for employee-only coverage. Under that interpretation, family members were not eligible for the PTC if the self-only coverage for the employee was affordable — even if the cost of family coverage was more than the family could afford.
This new rule provides that a group health plan is affordable for a family member if the employee’s required contribution for family coverage under the plan does not exceed the required contribution percentage of household income for the taxable year (9.12 percent of household income for plan years starting in 2023).
For this purpose, an employee’s required contribution for family coverage is the portion of the annual premium the employee must pay for coverage of the employee and all other individuals included in the employee’s family who are offered coverage under the group health plan (e.g., the cost of employee +1, employee +spouse, employee +children or family coverage options for includable family members). Note individuals includable in the employee’s family are limited to their spouse, if they file a joint tax return and any dependent for whom the employee can claim an exemption on his or her income tax return for the taxable year (i.e., an individual who qualifies as tax dependent under the Internal Revenue Code). Therefore, to the extent that a child over age 18 is not a “qualifying child” under the Code, their cost of coverage would not be used for determining affordability regardless of whether the child is enrolled in the plan.
Where family coverage is not affordable, the related individuals can decline the coverage offered by the employer and receive PTCs to purchase individual coverage on the Exchange. The new rules will be used to determine whether anyone in an employee’s household qualifies for a PTC when families apply for 2023 coverage under the Exchanges.
Under the final rules, a group health plan satisfies the minimum value requirement for related individuals only if the plan’s minimum value percentage is at least 60 percent based on the plan’s share of the total allowed costs of benefits provided to the related individual and the plan provides substantial coverage of inpatient hospital services and physician services.
Generally, if a group health plan provides minimum value to an employee, then the plan also will provide minimum value for related individuals provided the scope of benefits is the same for the employee and related individuals and cost sharing (including deductibles, copayments, coinsurance and out-of-pocket maximums) under the plan is the same for the employee and related individuals under the tier of coverage elected.
In conjunction with the final regulations, the IRS issued Notice 2022-41, which states that a cafeteria plan may allow an employee to revoke prospectively an election of family coverage under a group health plan that is not a health Flexible Spending Account (FSA) and that provides minimum essential coverage, as long as both of the following conditions are satisfied:
A cafeteria 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 health insurance plan 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.
Sponsors of group health plans should be aware of the following implications:
Segal can assist plan sponsors to understand how premiums for family coverage can be evaluated in light of the new rule. Segal can also assist plan sponsors in amending their cafeteria plans to provide for this new family-status change.
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.