The Biden Administration issued a final rule fixing the so-called ACA 'family glitch,' which had prevented family members of workers with employer-sponsored insurance from accessing premium tax credits on the ACA marketplace if the employee's individual coverage was deemed affordable. The fix expanded marketplace access for potentially millions of family members previously locked out of subsidized coverage. The Council analyzed the implications for employer health plan design and the role of brokers in advising affected clients.
On Tuesday, October 11, The Biden administration finalized rules to fix a glitch in the Affordable Care Act (ACA) related to the affordability of employer coverage for family members of employees. The Rule modifies the eligibility criteria for related individuals of employees to obtain premium tax credits by de-linking their eligibility from the affordability test for employees. The administration estimates that the change will allow about one million people to gain subsidized ACA coverage, costing $38 billion over 10 years.
Of note, the Rule:
- Does not impact the penalty liability of Council members subject to the employer-shared responsibility provisions of the ACA
- Does not touch the employee affordability test and therefore would not impact the penalty structure under the employer mandate
- Does not impact the penalty liability of Council members subject to the employer-shared responsibility provisions of the ACA
- Does not touch the employee affordability test and therefore would not impact the penalty structure under the employer mandate
See below for a detailed summary of the Final Rule’s key changes.
Employer Shared Responsibility Requirements
- The ACA requires employers with more than 50 full-time employees (Applicable Large Employers) to offer minimum essential coverage to full-time employees (and their dependents) or face a penalty.
- Employers are subject to the shared responsibility penalty if two conditions are met:
- 1) an employee has not been offered affordable coverage (or hasn’t been offered coverage at all) AND
- 2) an employee has signed up for an exchange plan where they are eligible or have received a subsidy.** Note that the penalty is tied to whether the employee enrolls in marketplace coverage and receives a tax credit for themselves.
- An employee’s coverage is considered “affordable” if the employee’s contribution for self-only coverage does not exceed a specified percentage of the employee’s household income (currently 9.83%). If an employer’s plan is not “affordable,” the employee may qualify for premium tax credits through the exchange. The employer may then face a penalty if the employee enrolls in an exchange plan (Prong 2).
- The ACA requires employers with more than 50 full-time employees (Applicable Large Employers) to offer minimum essential coverage to full-time employees (and their dependents) or face a penalty.
- Employers are subject to the shared responsibility penalty if two conditions are met:
- 1) an employee has not been offered affordable coverage (or hasn’t been offered coverage at all) AND
- 2) an employee has signed up for an exchange plan where they are eligible or have received a subsidy.** Note that the penalty is tied to whether the employee enrolls in marketplace coverage and receives a tax credit for themselves.
- 1) an employee has not been offered affordable coverage (or hasn’t been offered coverage at all) AND
- 2) an employee has signed up for an exchange plan where they are eligible or have received a subsidy.** Note that the penalty is tied to whether the employee enrolls in marketplace coverage and receives a tax credit for themselves.
- 1) an employee has not been offered affordable coverage (or hasn’t been offered coverage at all) AND
- 2) an employee has signed up for an exchange plan where they are eligible or have received a subsidy.** Note that the penalty is tied to whether the employee enrolls in marketplace coverage and receives a tax credit for themselves.
- An employee’s coverage is considered “affordable” if the employee’s contribution for self-only coverage does not exceed a specified percentage of the employee’s household income (currently 9.83%). If an employer’s plan is not “affordable,” the employee may qualify for premium tax credits through the exchange. The employer may then face a penalty if the employee enrolls in an exchange plan (Prong 2).
Impact of Current Interpretation on Family Members of Employees – the “Family Glitch”
- Notably, for related individuals of employees (this includes both kids and spouses), their eligibility for premium tax credits is currently tied to whether the employee’s self-only plan is considered affordable. If the employee has access to an affordable plan for themselves (regardless of the affordability of a family plan) then the employee’s family members are deemed to have access to affordable coverage and would be ineligible for tax credits.
- By linking the ability of employee family members to qualify for tax credits to whether the employee has access to an affordable plan for themselves, the rules have rendered millions of people ineligible for subsidized marketplace coverage, resulting in them paying higher portions of their incomes toward premiums.
- Notably, for related individuals of employees (this includes both kids and spouses), their eligibility for premium tax credits is currently tied to whether the employee’s self-only plan is considered affordable. If the employee has access to an affordable plan for themselves (regardless of the affordability of a family plan) then the employee’s family members are deemed to have access to affordable coverage and would be ineligible for tax credits.
- By linking the ability of employee family members to qualify for tax credits to whether the employee has access to an affordable plan for themselves, the rules have rendered millions of people ineligible for subsidized marketplace coverage, resulting in them paying higher portions of their incomes toward premiums.
The Final Rule’s Solution and its Impact on Large Employers
- To solve this “family glitch,” the Final Rule modifies the premium tax credit eligibility requirements for related individuals. Rather than linking the affordability of an employer plan for a related individual to whether the employee’s self-only plan is affordable, the rule creates a separate affordability standard for family members.
- Under the Final Rule, “an eligible employer-sponsored plan is affordable for a related individual if the employee’s required contribution for family coverage under the plan does not exceed the required contribution percentage…of the applicable taxpayer’s household income for the taxable year.”
- The Final Rule is explicit that while the revised provisions may affect whether related individuals are eligible for tax credits, they do not affect an employee’s eligibility for tax credits and thus “do not affect the liability of the ALE [Applicable Large Employer] of the employee.”
- To solve this “family glitch,” the Final Rule modifies the premium tax credit eligibility requirements for related individuals. Rather than linking the affordability of an employer plan for a related individual to whether the employee’s self-only plan is affordable, the rule creates a separate affordability standard for family members.
- Under the Final Rule, “an eligible employer-sponsored plan is affordable for a related individual if the employee’s required contribution for family coverage under the plan does not exceed the required contribution percentage…of the applicable taxpayer’s household income for the taxable year.”
- The Final Rule is explicit that while the revised provisions may affect whether related individuals are eligible for tax credits, they do not affect an employee’s eligibility for tax credits and thus “do not affect the liability of the ALE [Applicable Large Employer] of the employee.”
The Final Rule becomes effective 60 days after publication in the Federal Register, but we do expect challenges to the Rule given the significant pushback on the Department’s earlier proposed rule from key members of Congress. Specifically, in May 2022, Senators Burr, Toomey, and Cassidy sent a letter to the IRS arguing that the Department’s proposed rule is inconsistent with the plain reading of the ACA and would “dramatically expand spending on Obamacare plans.”
We will continue to monitor this issue and alert you of any further developments.
