Proposal Could Lessen Family Members' Dependence on Employer Health Plans

[updated: 4/26/22]

The U.S. Treasury Department and the IRS have issued a proposed rule that would 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.

Starting in 2023, if coverage for the family as a whole costs more than about 10 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, if the proposal takes effect.

The proposed rule and an IRS fact sheet were posted on April 5 and will be published in the Federal Register on April 7.

Ending 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, in 2022, an offer of a self-only coverage that does not exceed 9.61 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. This is referred to as the "family glitch."

Unaffordable Family Coverage

"For family members of an employee offered health coverage through an employer, the cost of that family coverage can sometimes be very expensive and make health insurance out of reach," the IRS said. "The family glitch affects about 5 million people and has made it impossible for many families to use the premium tax credit to purchase an affordable, high-quality marketplace plan."

According to the IRS, allowing family members of workers who are offered affordable self-only coverage to qualify for premium tax credits would mean an estimated 200,000 uninsured people would gain coverage, and nearly 1 million Americans would see their coverage become more affordable. "Many families would be able to save hundreds of dollars a month thanks to lower premiums," the IRS said.

Similarly, Jeff Levin-Scherz, population health leader at consultancy WTW, said that if the proposal goes into effect it "could provide a valuable source of coverage to some family members of low-wage workers."

Options for Family Members

According to comments attributable to a senior administration official at an April 5 press briefing, spouses and adult children who are offered insurance through family members' jobs are sometimes paying 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."

Tango Health, a software and services company focused on employer-sponsored health care, blogged 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." 

Reporting Changes

Advised Suzanne G. Odom, a principal in the Greenville, S.C. office of law firm Jackson Lewis P.C., "In order for the Internal Revenue Service to make premium tax credit determinations involving family coverage, they may require further information reporting from employers. IRS Forms 1094 and 1095 might be modified to require separate affordability reporting regarding both employee-only coverage and other coverage offers," she noted.

Tango Health noted that "employers currently only report the lowest cost employer-sponsored self-only plan to the IRS. The question is whether fixing the 'family glitch' will pave the way for a new requirement in the future—reporting on the lowest cost family plan."

Altering Employer Coverage

The proposal isn't without critics. Rep. Virginia Foxx, R-N.C., for instance, the top-ranking Republican on the House Education and Labor Committee, said in a statement that "the vast majority of the 5.1 million Americans who fall into the family glitch are already insured," and that the changes "would weaken the firewall between the ACA and employer-sponsored insurance."

If finalized, she added, the proposed change would "push millions off their employer-sponsored plans and onto taxpayer subsidized plans unnecessarily" and "chip away at employer health coverage, which has been the backbone of health insurance for decades."

The proposal does not address funding for the expanded ACA marketplace subsidies. If the rule is finalized, the expanded financial assistance would be available for ACA plan coverage starting Jan. 1, 2023.

The Treasury Department and IRS are accepting comments on the proposal through June 6, 2022, via the Federal eRulemaking Portal (indicate IRS and REG-114339-21).

Related SHRM Article:

SHRM Asks IRS Not to Increase Employer Reporting Burdens Under Proposed ACA Fix, SHRM Online, June 2022