The Biden administration has proposed regulations under the Affordable Care Act (ACA) to make more employees’ family members eligible for subsidized coverage through ACA marketplaces, or insurance exchanges. The move will not affect employers’ obligations under the ACA’s employer mandate but might affect how employers price dependent coverage.
The proposed rules would eliminate the ACA’s so-called “family glitch,” a regulatory interpretation of the ACA under which employees’ family members are deemed to have an offer of minimum value (at least 60% actuarial value) and affordable employer-sponsored medical coverage where the employer’s offer of self-only minimum value coverage is considered affordable. That deeming rule has disqualified many employees’ family members from eligibility for federally subsidized coverage in an ACA marketplace, even where the employer’s offer of coverage to the family members is unaffordable, under ACA standards.
The elimination of the family glitch would become effective for taxable years (i.e., calendar years) beginning after the rules are finalized. Federal regulators expect to finalize the rules in 2022, meaning they would be effective for 2023 and beyond.
As noted above, the new rules would not expand employers’ obligations under the ACA’s employer mandate. That is, the rules would not require employers, under threat of penalty, to offer “affordable” minimum value coverage to spouses and dependents of ACA full-time employees. But with final adoption of the proposed rules severing dependents’ eligibility for federally subsidized medical coverage from the affordability of self-only coverage tiers, employers may be inclined to dramatically increase the cost of dependent coverage for some classes of employees, to drive their dependents to ACA marketplaces.
Background
Under the ACA and its existing implementing regulations, an employee looking to buy medical coverage in an ACA marketplace is not eligible for federal subsidies to defray the cost of that coverage if the employee is either (1) enrolled in at least bare-bones coverage offered by the employer (other than minor coverage such as a health FSA) or (2) merely offered employer-sponsored medical coverage that is minimum value and considered “affordable” to the employee.
Coverage is considered affordable to the employee if the employee is not required to pay more than 9.5% of household income for self-only coverage under the least expensive minimum value coverage offer made by the employer.
Lockton comment:This “affordability” threshold of 9.5% of household income (basically, adjusted gross income on the employee’s Form 1040) is adjusted annually for inflation. For 2022, that threshold is 9.61%. It will likely be significantly higher in 2023, the first year in which the newly proposed rules are expected to apply.
Existing regulations also provide, however, that if the least expensive self-only, minimum value coverage offered to the employee is considered “affordable,” then the coverage offered to the employee’s spouse and dependents is also deemed to be affordable, even if the cost of family coverage requires the employee to spend more than 9.5% (adjusted for inflation) of household income on that coverage.
This deeming rule is called the “family glitch” because the deemed affordability of employer-based minimum value coverage renders the spouse and other dependents ineligible for ACA marketplace subsidies, no matter how unaffordable their employer-sponsored coverage offer really is to the family unit.
Lockton comment:As a result, this glitch has forced many employers to keep the employee premium share for dependent coverage relatively low because the dependents could not look to ACA marketplaces for subsidized medical insurance.
Repairing the family glitch
This family glitch has a basis in the legislative language of the ACA, but ACA proponents have been unable to fix it legislatively. The glitch didn’t become widely apparent until the approach of the effective date of the ACA’s individual mandate (since repealed), but by that time, Republicans controlled both houses of Congress and were not inclined to tinker with the ACA to expand eligibility for federally subsidized medical insurance.
Lockton comment:Interestingly, it was the ACA’s implementing regulations issued by the Obama administration that interpreted the ACA to impose the family glitch, even though those regulators could have differently interpreted the relevant ACA statutory language.
With Democrats now holding both a majority of seats in the House of Representatives and thin control of the Senate, it’s possible the glitch could be fixed via legislation but the Biden administration is taking the easier path and attempting to fix the glitch by tinkering with the Obama regulations that first interpreted the ACA.
Under the proposed reinterpretation, the affordability of employer-based minimum value coverage for an employee’s spouse will be determined based on whether the employee’s premium cost for employee-plus-spouse coverage, under the cheapest minimum value offering made by the employee’s employer, falls within the affordability boundary.
In turn, affordability of minimum value coverage for an employee’s children, or spouse and children, will turn on whether the employee’s share of premium for employee-plus-children, or employee-plus-family (as applicable), under that cheapest minimum value offering, falls within the affordability boundary.
This result is best illustrated with an example:
Example 1: Assume that the newly proposed rules take effect in 2023, that for that year the ACA’s affordability threshold for employment-based coverage is 9.75% of household income, that in 2023 Jane’s employer, ABC Company, offers minimum value medical coverage to Jane and Jane’s family, and that Jane’s household income for that year does not exceed four times the federal poverty level, the point at which subsidy eligibility fades out for any otherwise subsidy-eligible individual.
Jane’s share of premium for self-only coverage in 2023, under the least expensive minimum value coverage offered by ABC, doesn’t require Jane to spend more than 9.75% of her household income. Thus, the offer of self-only coverage to Jane is considered “affordable.” As a result, while Jane can turn down ABC’s offer, Jane is not eligible to obtain subsidized coverage in an ACA marketplace in 2023.
Jane’s spouse, Paul, does not have an offer of minimum value, affordable coverage from his employer for 2023 and is not enrolled in any medical coverage that, were he enrolled, would automatically disqualify him from subsidy eligibility (i.e., any medical coverage more robust than a health FSA). Assume that for Jane to cover herself and Paul in 2023 under the cheapest, minimum value employee-plus-spouse tier of medical coverage offered by ABC, Jane would have to pay premium equal to 10.5% of household income, well above the assumed 2023 affordability threshold of 9.75%.
Under current ACA regulations, the spousal coverage offered to Paul in 2023 under ABC’s plan would be deemed affordable simply because Jane’s offer of self-only coverage would be considered affordable. As a result, Paul could decline spousal coverage under ABC’s plan but would not qualify for subsidized coverage in an ACA marketplace in 2023. In short, Paul would be caught in the ACA’s “family glitch.”
Under the proposed tweak to the family glitch, however, the deeming rule would be eliminated, and Paul would be able to seek subsidized coverage in an ACA marketplace in 2023 because Jane’s premium cost in that year, for the cheapest, minimum value employee-plus-spouse coverage tier under the ABC plan, exceeds 9.75% of her household income. Jane, however, would still be treated as having an offer of affordable, minimum value coverage because her premium cost for the cheapest, minimum value self-only coverage in 2023 remains affordable. Thus, Jane would remain ineligible for subsidies in an ACA marketplace.
The fact that Paul would become eligible for ACA marketplace subsidies in 2023 has no impact on ABC’s responsibilities under the ACA employer mandate for that year. That mandate will continue to require, under threat of penalty, an offer of minimum value and affordable coverage only to ACA full-time employees, not to their spouses or dependents.
The same analysis would apply to coverage in 2023 of Jane and her children under the cheapest, minimum value, employee-plus-children tier of the ABC plan, and to coverage of Jane, Paul and their children under the cheapest, minimum value, employee-plus-family tier of that plan, where the premium cost to Jane under those tiers exceeds 9.75% (our fictional affordability threshold) of Jane’s household income in 2023. Jane would remain ineligible for ACA marketplace subsidies in 2023, but Paul and the children would qualify for those subsidies, assuming they had no other offers of minimum value and affordable coverage and were not enrolled in any disqualifying medical coverage.
The family members’ qualification for marketplace subsidies in 2023 would not affect ABC’s obligations under the ACA’s employer mandate for that year.
What about non-dependents?
The ACA requires group medical plans offering coverage to employees’ children to offer that coverage to children until their 26th birthday (effectively, until the end of the month in which the child turns 26), regardless of the dependency status of the child. Under the proposed rules, when determining the affordability of coverage offered to an employee’s children, the cost of covering a non-dependent child is not considered.
Lockton comment:This will be more relevant to individuals who are eligible under plans offering coverage tiers tied to specific numbers of dependents (e.g., employee-plus-one, employee-plus-two, etc.) than to plans offering an employee-plus-family tier where the employee’s premium for family coverage does not change with two or more enrolled children.
Is this an opportunity for employers to re-think dependent coverage strategies?
For employers, the most significant consequence of the proposed rules might be that even where the offer of self-only coverage is affordable, spouses and dependents will qualify for marketplace-based subsidies if the spouse, dependent children or family coverage tiers are priced above the affordability threshold. As a result, employers could begin to price spousal and dependent coverage at a level high enough to drive spouses and dependents to ACA marketplaces where their cost of coverage, net of federal subsidies, would be cheaper than the employer’s pricing.
Lockton comment:The employer will want to consider nondiscrimination consequences of this strategy, notwithstanding federal regulators’ complete lack of interest over the past 30 years in nondiscrimination rules under Tax Code Sections 105 (self-insured healthcare plans) and 125 (pretax contributions for healthcare coverage). Because the subsidy available to a household in an ACA marketplace diminishes with increases in household income, it’ll make more sense under this strategy to raise the price of spousal and dependent coverage for non-highly paid employees than it will to raise the price for highly paid employees, but to raise the price for the former and not the latter triggers the nondiscrimination issue. Even if federal regulators seem disinterested, due diligence lawyers for a buyer in a corporate transaction would likely take notice.
What about ACA reporting?
When an employee’s spouse or dependent children apply for subsidized medical coverage through an ACA marketplace, the marketplace already requires them to reveal the premium contributions the employee must pay, under the employer’s cheapest minimum value plan, to obtain coverage under that plan for the family members. As a result, there does not appear to be an extant need for the IRS to begin requiring employers to report that information, and indeed the newly proposed rules do not require such reporting.