The employer’s role in fixing ‘family glitch’

Photo of business man protecting family with umbrella

Just prior to the start of 2023 open enrollment season, the IRS finalized new rules that will now make it easier for some families to access premium tax credits (PTC) for health insurance purchased through an exchange established under the Affordable Care Act.

From 2014 to 2022, these premium tax credits — also known as subsidies — were generally available only to those families whose household income was between 100% and 400% of the poverty line. However, there was one major exception — a “glitch,” if you will. If an employed member of the family was eligible for a workplace health plan that offered “affordable” employee-only coverage — “affordable” meaning that its cost would not exceed 9.12% of that person’s household income in 2023 — and provided minimum value, his or her dependents (i.e., spouses or children) were not eligible to receive a PTC to purchase subsidized coverage.

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

Under the new rules, which go into effect for tax years beginning after Dec. 31, 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.

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 midyear election changes. Now, non-calendar-year cafeteria plans may permit family members to drop coverage midyear 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 midyear 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 Jan. 1.

This article appeared in the November 10, 2022, issue of The Journal Record. It is reproduced with permission from the publisher. © The Journal Record Publishing Co.