On October 11, 2022, the US Department of Treasury (Treasury) and the Internal Revenue Service (IRS) issued final regulations to modify how affordability under the Affordable Care Act (ACA) is determined for an offer of coverage to a family member by an employer-sponsored group health plan, effective for the tax year beginning after December 31, 2022. By changing the affordability analysis to look at the total cost to cover family members—rather than the cost to only the employee—the new rule expands eligibility to receive premium tax credits (PTCs) in the ACA marketplace to an employee’s spouse and dependents.
The final rule is intended to resolve the “family glitch,” an inadvertent consequence of how affordability was previously determined by the ACA that caused family members to be disqualified from obtaining PTCs in the ACA marketplace. The ACA requires employer-sponsored health plans to offer coverage that meets the minimum value requirements and is affordable, but affordability was based only on the cost of coverage to the employee—not the employee’s family members. Prior to the implementation of the final rule, if a household member had access to employer-sponsored health coverage that met the minimum value and affordability requirements, the family members were disqualified from PTCs for the ACA marketplace. As a result, the family coverage offered by an employer might be unaffordable to the family members, but the spouses and dependents were still ineligible for PTCs for the ACA marketplace based on the affordability of employee-only coverage. The new rule changes the determination of whether family members are eligible for tax subsidies for the ACA marketplace to be based on the offer of coverage to a spouse or dependent.
1. Affordability and Minimum Value
The final rule indicates that an offer of coverage from an employer-sponsored health plan is affordable for an employee’s family member if the cost of family coverage does not exceed 9.5% of household income, as adjusted annually. For 2023, the percentage is 9.12%. Similar to the existing regulations for an employee-only offer of coverage, a health plan is considered to provide minimum value to a family member if it has at least a 60% actuarial value and provides “substantial coverage” of inpatient hospital services and physician services. If the scope of benefits and cost-sharing offered to employees is the same as to family members, then the final rule clarifies that this will be considered minimum value.
2. Employer Mandate
Even though affordability for family members will now be based on the cost of family coverage, affordability for employees under the employer mandate remains the same. As a result, the final rule confirmed that the liability of a large employer under the employer mandate will be unaffected by the new rule and penalties would only be assessed on the employer if the coverage is not affordable based on employee-only coverage. This is because the ACA only requires employer-sponsored health plans to provide minimum value and affordable coverage to employees. This differs from the requirement that the employer-sponsored health plans offer minimum essential coverage to full-time employees and their dependents, a much lower threshold. Thus, an employer can still avoid penalties under the ACA by offering coverage only to employees that meets both the minimum value and affordability requirements. However, any family members of such employees may now be eligible for a PTC if the coverage is not affordable based on the cost of family coverage—but this will not result in an employer mandate penalty to the employer. In addition, the final rules clarify that the safe harbors an employer may use to determine affordability under the employer mandate regulations also remain unchanged.
Treasury and the IRS simultaneously issued Notice 2022-41 in connection with the final rule to permit employers with non-calendar year plans to amend their Section 125 plans (also known as a cafeteria plan or a flexible spending account plan) to allow for a midyear election change. Family members could then drop their employer-sponsored health plan coverage and move to the ACA marketplace if newly eligible for a PTC. This would take place either during annual open enrollment or during a special enrollment period for the ACA marketplace. The guidance is permissive and applies only to group health plan coverage that is minimum essential coverage under the ACA, not flexible spending accounts. The notice applies to elections effective on and after January 1, 2023. The expectation is that the regulations will eventually result in a decrease in employer spending, though few individuals may move to the ACA marketplace initially.
It may be too late for employers who have finalized annual enrollment materials to consider plan design changes in response to the new rule. Other employers, though, may be tempted to increase the cost of family coverage to motivate the migration of spouses and dependents from the employer-sponsored health plan and allow family members to qualify for a PTC in the ACA marketplace. Employers should consider whether any such changes could cause low-risk spouses and dependents to move to the ACA marketplace, creating an imbalance of at-risk individuals covered by the plan. A change in the cost of family coverage might also be considered a special mid-year election change event under certain Section 125 plans, but employers would need to consider whether plan amendment and summary plan description changes are necessary to implement this change.
It is anticipated that the final rule will be met with legal challenges. Regardless, employers should begin consulting with legal counsel and their health plan brokers and vendors to determine the best course of action for their health plans going forward.