The IRS has issued final regulations that change the way employer-sponsored plan affordability is calculated when determining if a family is eligible for a premium tax credit (PTC) when purchasing individual health insurance through a public Exchange. In fixing what is commonly referred to as the “family glitch,” affordability for family members will be based on the employee’s cost to cover the entire family rather than the cost of employee-only coverage. The change will allow more spouses and dependents to qualify for PTCs applied toward the cost of individual health coverage purchased through a public Exchange.
Effective January 1, 2023, employer plan affordability for family members will be based on the required cost for the entire family to participate in the employer-sponsored plan. Affordability for the employee will still be based on the employee’s cost for single (employee-only) coverage.
Important note: Employer contributions to determine ACA affordability remain unchanged.
Depending on an employer’s contribution arrangement, this could create a situation where family members are eligible for the PTC purchasing individual coverage, while the employee remains ineligible based on the cost of single coverage.
Determining the Cost of Employer-Sponsored Coverage
To determine the cost of coverage for purposes of affordability for family members, the entire employee contribution for family coverage is considered. For example, if an employer charges employees $150/month to participate in single employee-only coverage and $600/month for the employee to enroll in family coverage, you would compare the $600 to the employee’s household income to determine affordability for the family member and compare $150 to the employee's household income to determine affordability for the employee.
Employee Election Changes - Open Enrollment is Near!
If an employer’s open enrollment period aligns with the annual exchange open enrollment period, then it will be simple for qualified individuals to decline group coverage and enroll in subsidized individual coverage through an exchange. However, for employer benefits provided through a Section 125 cafeteria plan, employees are generally not allowed to make changes to their elections midyear unless they experience an allowable election change event as defined by the Section 125 rules.
To address situations where an employee may want to drop family coverage on the employer-sponsored plan so that the family can purchase subsidized individual health insurance, the IRS has also issued notice 2022-41 which creates a new election change event for non-calendar year plans under Section 125 rules.
According to this new Section 125 rule, a non-calendar year cafeteria plan may allow an employee to prospectively revoke an election of family coverage under a group health plan provided the following conditions are satisfied:
- A “related individual is eligible for a special enrollment period to enroll in a qualified health plan (QHP) through an Exchange, or an already-covered related individual seeks to enroll in a QHP during the Exchange’s annual open enrollment period; 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 employer coverage that is revoked.
Employers can rely on an employee’s attestation as proof that their relative has enrolled or will enroll in exchange-based coverage. Employers are not required to allow these election changes.
What it does not change:
- The final rule does not add any new requirements for employers.
- It does not make any changes to the employee affordability rule or the employer’s offer of affordable coverage. Employers will still base ACA affordability on employee-only coverage (9.12% of household income for 2023).
- Employers are still not required to make employer contributions to dependent health care coverage. If an employer offers minimum value, affordable coverage for their employee, the employee will still not be eligible for a premium subsidy. This new rule would only open premium subsidy eligibility for the employee’s spouse and dependents. Therefore, employers could see fewer dependent enrollments in their health plans.
Note that the Inflation Reduction Act extended increased PTCs available when purchasing individual coverage to the public Exchange through 2025.
The combination of the increased subsidies with the ability for family (tax-dependent) members to qualify based on the family cost of the employer plan means that, depending on employer contribution polices and an employee’s household income, a significant number of employees may find that family coverage is more affordable through a public Exchange than what is currently offered under their employer's plan.
The new rules are going into effect just in time for the open enrollment period that starts November 1 for Healthcare.gov/federal Exchange-based coverage (state-based Exchanges may have different annual open enrollment periods).
This means that employees may want to reconsider elections that they are currently in the process of making for employer-based calendar year plans. If an employee’s family members who become newly eligible for subsidies under the proposed regulations decide to purchase ACA exchange coverage rather than enroll in employer-provided coverage. This type of “split coverage” would result in multiple deductibles and maximum out-of-pocket limits for the family, thereby potentially increasing total out-of-pocket costs. In addition, if the individual has multiple offers of coverage from multiple employers, the offer is considered affordable coverage if at least of the offers is affordable. Employers will need to understand how this may affect some employees’ enrollment decisions.
Amwins Connect will continue to monitor the situation to see if courts intervene in a way that could change the effective date of the change. Reach out to your Amwins Connect team with any questions.
Review our Compliance Brief
NAHU Compliance Corner webinar presentation (10/20/2022)
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