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.

Background

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.

New family affordability rule

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.

New minimum value rules

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.

New status-change event

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:

1. One or more related individuals are eligible for a special enrollment period to enroll in a health insurance plan through an Exchange or one or more already-covered related individuals seeks to enroll in a health insurance plan during the Exchange’s annual open enrollment period.
2. 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 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.

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.

Impact on group health plans

Sponsors of group health plans should be aware of the following implications:

• No impact on penalties — Under the ACA employer mandate, applicable large employers (having 50 or more full-time and full-time equivalent employees) must offer essential health coverage that is affordable and meets minimum value or pay a penalty if an employee receives a PTC for ACA exchange coverage. However, no corresponding penalty is imposed if the employee’s family member receives a PTC for ACA exchange coverage.
• No impact on information reporting or affordability safe harbors — The Treasury Department and the IRS clarify that nothing in the final regulations affects any information reporting requirements for employers, including the reporting required under sections 6055 and 6056, which is done on Forms 1095-B and 1095-C. Further, the IRS does not intend to revise Form 1095-B or Form 1095-C to require any additional data elements related to the new rules. Additionally, the safe harbors that an employer may use to determine affordability for purposes of the employer shared responsibility provisions under section 4980H continue to be available for employers.
• Potential migration to Exchange coverage — With new access to subsidized premiums, employees and their family members may find that the family members can obtain health insurance on the Exchange that is less expensive than the cost of enrolling in employer-sponsored family coverage. The Premium Tax Credits available to all individuals on the Exchanges are increased through 2025, so the difference in the cost of employer family coverage and Exchange coverage could be more significant. (See our August 10, 2022 insight, “The Inflation Reduction Act’s Health Provisions.”)
• Plan amendment — Plans implementing the new cafeteria plan status-change event may need to be timely amended, depending on how the plan currently describes such events. Generally, an employer must adopt the amendment on or before the last day of the plan year in which the new status change elections are implemented. However, for employers that implement this change for a plan year that begins in 2023, the amendment must be adopted on or before the last day of the plan year that begins in 2024.

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.