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October 18, 2022
The IRS has issued final regulations (public-inspection.federalregister.gov/2022-22184.pdf) 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.
More information regarding the background of the “family glitch” can be found at www.imacorp.com/benefits/news/irs-issues-proposed-rules-to-fix-the-affordability-family-glitch/ where IMA previously posted when proposed rules on this matter were issued back in April.
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 on the exchange, while the employee remains ineligible based on the cost of single 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 members and compare $150 to the employee’s household income to determine affordability for the employee.
Practical insight: While this does not directly impact employers, we anticipate that some employers will adjust its dependent contributions to help lower wage earner family members qualify for the PTC when purchasing individual coverage on the exchange.
To affect an individual’s eligibility for a PTC, an employer-sponsored plan must also provide benefits that meet the definition of minimum value (MV). In addition to providing 60% or better actuarial value, previous guidance indicated that plan benefits must also include substantial coverage of inpatient hospital services and physician services. This was previously set forth in proposed rules by the IRS, but not finalized. The IRS has formalized this requirement in the final rules.
Tip: this is unrelated to the family glitch, but the IRS took this opportunity to finalize rules. Most employers were already operating under this assumption.
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 members from coverage on the employer-sponsored plan so those individuals can purchase subsidized individual health insurance, the IRS has also issued Notice 2022-41 (www.irs.gov/pub/irs-drop/n-22-41.pdf)
According to this new Section 125 rule, a non-calendar year cafeteria plan may allow an employee to prospectively remove family members from coverage under a group health plan provided the following conditions are satisfied:
Employers may rely on the employee or related individual’s representation that they plan to enroll in Exchange coverage when revoking the employer coverage.
To allow the new permitted election change, the employer must amend their Section 125 plan and adopt on or before the last day of the plan year in which the elections are allowed (however, the IRS is specifically allowing an extra year in this case: “an employer may amend a cafeteria plan to adopt the new permitted election changes for a plan year that begins in 2023 at any time on or before the last day of the plan year that begins in 2024”). The IRS also requires the employer to inform participants of this change as soon as it’s available, even if the written amendment comes later.
This change in affordability determination may lead to confusion with regards to direct impact to employers.
Note that the American Rescue Plan 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 members to qualify based on the family cost of the employer plan means that, depending on employer contribution policies and an employee’s household income, a significant number of employees may find that coverage for family members 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 coverage to begin January 1, 2023, in the www.Healthcare.gov federal Exchange (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. Employers will need to understand how this may affect some employees’ enrollment decisions.
Let your PS&F Benefits team know if you have any questions. We review affordability every year with our applicable large employer (ALE) clients and are happy to assist as you strategize for your upcoming plan year.
PS&F will continue to monitor regulator guidance and offer meaningful, practical, timely information.
This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.
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