How changes to the “family glitch” affect workplace health plans

Person using a calculator to figure costs of health plans

The IRS finalized new rules that change eligibility requirements for the premium tax credit (PTC) created under the Affordable Care Act. It is now easier for an employee’s family members to enroll in subsidized health insurance through an exchange. Related guidance creates a new mid-year cafeteria plan election change event to help family members move to subsidized exchange coverage.

Background

The PTC was created to subsidize health insurance obtained through an exchange. Generally, household income must be between 100-400% of the federal poverty line to qualify for a PTC. But, if an employee is eligible for a workplace health plan that offers “affordable” self-only coverage and provides minimum value, no family members are eligible for a PTC. Coverage is affordable if the employee premium for self-only coverage does not exceed 9.12% of household income in 2023.

Put simply, the cost of family coverage is not considered to determine whether a workplace health plan is affordable. If the cost of employee-only coverage is affordable, the entire family is ineligible for a PTC. Industry insiders informally termed this the “family glitch.”

New regulations

Now, solely for purposes of claiming the PTC, if the employee cost for family coverage is not affordable, the employee may claim a PTC to subsidize insurance obtained through an exchange for family members.

This change only affects a family’s eligibility for the PTC.  The rules for assessing an employer shared responsibility payment (ESRP) did not change. ESRP liability continues to be measured solely against the cost of self-only coverage. Premiums for family coverage may exceed the affordability threshold without risking ESRP exposure.

These rules are effective for tax years beginning after December 31, 2022.

Cafeteria plan change

Generally, employers must have a cafeteria plan to permit employees to pay premiums on a pre-tax basis. Cafeteria plans also dictate when employees may make mid-year election changes. Now, non-calendar year cafeteria plans may permit family members to drop coverage mid-year and enroll in exchange coverage. This change is optional.

Note that many cafeteria plans permit all election changes that are permitted by law, which means the cafeteria plan might automatically permit this new mid-year election change when it becomes effective. Employers should review their plan to ensure it will be operated consistent with its terms.

The new cafeteria plan rules are effective as of January 1, 2023.