Final Rule Lessens Family Members' Dependence on Employer Health Plans

This article was updated.

A new final rule issued by the IRS aims to make it less expensive for many spouses and dependents now covered under an employer-sponsored family health plan—or who are uninsured because family premiums are too expensive—to purchase coverage through the Affordable Care Act (ACA) marketplace.

The rule applies to coverage for the 2023 plan year, and so some employers may see a decline in requests for family coverage during the fall open enrollment season for next year's health plan benefits.

The rule, "Affordability of Employer Coverage for Family Members of Employees," was published in the Federal Register on Oct. 13. The final regulations adopt largely unchanged the proposed regulations that the IRS issued in April 2022.

The rule was accompanied by new cafeteria plan guidance in Notice 2022-41.

Ending the 'Family Glitch'

The rule addressed what its supporters have called the "family glitch." Under the ACA, employees and family members are not eligible for a premium tax credit to buy subsidized coverage on the ACA's health insurance marketplaces if the employee has access to "affordable" health insurance through an employer—meaning, as adjusted for 2023, an offer of self-only coverage that does not exceed 9.12 percent of the employee's income.

Current regulations, however, define employer-based health insurance as affordable if the coverage solely for the employee, and not for family members, is affordable, making family members with limited income ineligible for a premium tax credit for an ACA marketplace plan.

Starting in 2023, under the new rule, if coverage for the family as a whole costs more than 9.12 percent of household income under the lowest-cost employer-sponsored option, then the nonemployee family members will be eligible for financial assistance in the ACA marketplace.

"About 1 million Americans will either gain coverage or see their insurance become more affordable as a result of the new rule," according to a White House statement. "This marks the most significant administrative action to implement the Affordable Care Act since the law was first put into place."

Options for Family Members

According to comments attributed to a senior administration official at an April press briefing, spouses and adult children who are offered insurance through family members' jobs are sometimes spending 25 percent or 30 percent of their incomes on health insurance.

Some of the 5 million people affected by the family glitch, however, "may choose to stay in the coverage that they're in today because they find it more convenient to have their whole family in a single health plan," the official added. "But others, and the people for whom this is the greatest hardship, will … switch from the coverage that they have today into more affordable marketplace coverage."

Enhanced ACA Marketplace Subsidies

"Most of the rule goes into effect for the 2023 tax year, meaning family members who qualify can enroll in subsidized marketplace coverage for 2023," wrote Katie Keith, director of the Health Policy and the Law Initiative at the O'Neill Institute for National and Global Health Law at Georgetown University, in a Health Affairs Forefront blog post.

"The family glitch fix comes at a time of record-high marketplace enrollment," she noted, due in part to more-generous marketplace subsidies under an extension of the American Rescue Plan Act's enhanced subsidies by the Inflation Reduction Act.

Effect on Employer Plan Enrollment

As a result of the expanded eligibility for federal tax credits, "employer plans may see a decrease in enrollment of spouses and dependent children in their health plans," noted the employee benefits compliance team at benefits broker HUB International. "Employers with lower paid employees are most likely to see decreases in enrollment, especially if those employees have family members to cover, or if their family premiums are high."

HUB's analysis explained that the new rule does not change a plan sponsor's ability to impose a spousal surcharge, or a spousal exclusion based on access to other coverage, but "does give family members facing an exclusion or surcharge new options to avoid the impact of such plan designs."

No Effect on Employer Mandate

Keith explained that the final rule will not affect liability under the employer mandate that requires large employers to offer coverage to employees and dependents, because "penalties for violating the mandate are triggered only when an employee receives premium tax credits through the marketplace."

However, she said, "the final rule extends premium tax credits to only the family members of workers who are not offered affordable job-based family coverage. It does not affect the eligibility of employees and thus does not implicate the employer mandate."

No Additional ACA Reporting

Tax attorneys had noted that in order for the IRS to make premium tax credit determinations involving family coverage, the agency could require further information reporting from employers on IRS Forms 1094 and 1095.

For instance, while employers currently only report the lowest-cost employer-sponsored self-only plan to the IRS, there were concerns that fixing the family glitch could pave the way for a new requirement to also report on the lowest-cost family plan, among other changes.

In the final rule, however, the IRS stated that "nothing in these final regulations affects any information reporting requirements for employers, including the reporting required … on Form 1095-B, Health Coverage, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, respectively."

The IRS further stated it "does not intend to revise Form 1095-B or Form 1095-C to require any additional data elements related to the new rules."

In response to the proposed rule, the Society for Human Resource Management (SHRM) had cautioned the IRS about creating new administrative burdens for employers.

In a June 7 comment letter, Emily M. Dickens, SHRM's chief of staff and head of government affairs, wrote that "while the department's proposal to address this 'family glitch' provides a more meaningful opportunity for access to premium tax credits than the minimum value proposal, it also creates the potential for even greater reporting complexity."

She said that "adding an obligation to report the cost of dependent coverage would exacerbate existing challenges for HR professionals."

'Adverse Section' Concerns for Employers

In a June 6 letter critical of the proposed version of the rule, Katie Mahoney, vice president of health policy at the U.S. Chamber of Commerce, wrote, "there is a lot at stake if the employer-sponsored market is disrupted by seepage of healthy individuals onto a federally subsidized exchange plan."

She noted that according to White House estimates, 1 million people would move from their employer coverage into the ACA market due to fixing the family glitch.

"Individuals who choose to switch from their employer plan to the ACA market will likely be younger and healthier, opting for the low or no-cost premiums offered under ACA plans, even if it means higher deductibles and less rich benefits," Mahoney wrote. "The result will be adverse selection in employer markets—the healthy will leave employer coverage for ACA coverage while those with health conditions will stay on richer employer coverage. The result will no doubt further increase premiums and exacerbate problems in labor markets."

The risks associated with adverse selection, she noted, are "especially a concern with respect to small employer sponsored plans."

However, Tango Health, a software and services company focused on employer-sponsored health care, blogged after the proposed rule was issued that "some employees may switch from their family plans to a self-only plan so their dependents/spouses can access a premium subsidy. This could cause employer insurance costs to go down."

HUB International advised that "individuals who no longer enroll will have varied claims experience, thus a decrease in enrollment may or may not positively impact the plan."

Potential Legal Challenges

"It is expected that legal challenges will soon be brought against the rule," posted John Kirk, an attorney with law firm Graydon in Cincinnati.