Since its inception, the Affordable Care Act (“ACA”) has measured “affordability” based solely on the cost of employee-only coverage. This so-called “family glitch” has meant that spouses and dependent children of employees who are offered affordable, minimum value coverage have not been eligible for federal tax credits (Premium Tax Credits; “PTCs”) to purchase coverage through the marketplace.
As a result, even though such family members might not receive a penny of employer-subsidized health coverage, an employer’s satisfying mandate duties to the employee has always been “imputed” to children and spouses, thereby effectively blocking those family members from obtaining any federal money.
Recently the Internal Revenue Service (“IRS”) announced proposed regulations that would change this. This IRS change solely alters family access to federal marketplace coverage subsidy funding but does NOT expand the employer mandate to include family coverage.
The ACA requires Applicable Large Employers (“ALEs”) who average 50 or more full-time equivalent employees in the prior calendar year to offer health insurance to their full-time employees. This health coverage must meet the law’s Minimum Essential Coverage (“MEC”) requirement, be “affordable” (as defined by the ACA), as well as represent a type of MEC that satisfies ACA’s “Minimum Value” (“MV”) threshold.
MEC must also be offered to dependent children – but notably the coverage mandate can be satisfied even if the dependent child receives MEC that’s lower than the minimum value threshold. In addition, a health coverage offer to an employee’s spouse is not specifically required. Employers who fail to meet these requirements could be penalized.
In their current form, ACA rules squarely focus attention on coverage of full-time employees. ALEs must therefore contribute towards the employee’s coverage cost to ensure “affordability.” By contrast, ALEs are not required to pay anything towards the health coverage cost for the employee’s spouse or dependent children. (Although as a practical matter, insurance carriers may direct employers to do so under policy terms.)
Even though these rules often result in significantly higher overall family coverage costs, this employer mandate fulfillment “glitch” blocks the employee’s spouse and dependent children from receiving marketplace subsidy funding.
The proposed rule would change ACA’s affordability measure from being based solely on employee-only coverage, to being based on family coverage. (For rule-making purposes, family coverage refers to all tiers of coverage other than employee-only coverage.)
So, 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, family coverage, could also not exceed 9.5% (as adjusted) of household income.
The proposed rule confirms that employees who are offered affordable, minimum value, employee-only coverage remain blocked from federal subsidy assistance. However, if that employee’s spouse and/or dependent children were not also offered affordable coverage, those family members could now potentially become eligible for PTCs, depending on overall household earnings.
Importantly, these regulations do not expand employer mandate obligations or penalty risks. This is because employer penalties hinge on whether the employee received a PTC, not whether the spouse or dependent children received a PTC. Instead, this new expanded affordability requirement only relates to federal tax subsidy eligibility.
In other words, if an employer were to offer affordable employee-only coverage, but unaffordable family coverage, the spouse and dependent children would now become eligible to receive a PTC, but such PTC family member access would not trigger an employer penalty.
EMPLOYEE FAMILY MEMBERS DEFINED
The proposed rule also clarifies which family members are included for purposes of assessing whether coverage is affordable. Specifically, only the employee’s family for tax purposes would be included in determining whether coverage is affordable.
This potentially excludes adult children of the employee up to age 26 who are eligible for coverage under a parent’s employer plan, but no longer the tax dependent of the employee. This could make assessing affordability a challenge as a dependent child’s age suddenly becomes a key consideration.
Moreover, age alone is not the sole determinant as IRS rules for tax dependents hinge on a range of technical factors. This means that an 18-year-old child of one employee may no longer be a tax dependent, while a 22-year-old child of another employee remains a tax dependent..
MINIMUM VALUE COVERAGE FOR FAMILIES
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.
Although recently published, the proposed rules include a 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. (With the stated goal of becoming effective ahead of next year’s marketplace open enrollment season.)
Although this requirement does not alter ACA’s current employer mandate structure, the rule shift is expected to complicate employer 1094/1095 reporting and raises the specter of inadvertent reporting errors that could lead to (non-mandate), reporting penalties. Although reporting penalties are smaller than mandate penalties, they still represent a compliance risk. So, along with keen anticipation for this rule’s final regulations, revised requirements for future ACA reporting could represent another special area of concern.
In addition, the new rule could “splinter” families since spouses and children may now win access to premium subsidies and exit private employer-sponsored plans for marketplace coverage. Meanwhile, if the family member employee at the heart of the equation receives a MV/Affordable offer, that person remains blocked from joining his or her family on marketplace coverage.
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Notice of disclaimer
Neither JP Griffin Group, a division of Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.