On October 11, 2022, the IRS finalized its proposed rule to fix the 'family glitch' in eligibility rules for the ACA premium tax credit (PTC). The new final rule will be effective starting in the 2023 tax year.
Under the so-called 'family glitch' circumstance, family members were previously ineligible for a PTC if the cost of self-only coverage was affordable. A PTC for purchasing health insurance on the ACA's marketplace is available to people who do not have access to 'affordable' coverage through their jobs. Previously, spouses and children were ineligible for the PTC if the employee's contribution for self-only coverage in the employer-sponsored plan did not exceed 9.5% of household income (indexed annually) without considering any additional employee cost-share contribution for family coverage.
To increase access to PTCs for low-income families, the new rule applies a separate PTC affordability standard for family members based on the full cost-share contribution for family coverage. Under the rule, an eligible employer-sponsored plan will be treated as affordable for family members (i.e., the spouse if filing jointly and tax dependents) if the portion of the annual premium the employee must pay for family coverage, that is, the employee's required contribution, does not exceed 9.5% of household income (indexed annually). As a result, an employee's family may qualify for a PTC even if the employee does not.
Importantly, the new rule does not impact the employee affordability test and does not increase exposure to employer shared responsibility (employer mandate) penalties. Applicable large employers will continue to base affordability tests on the cost of self-only coverage, and employer mandate penalties will continue to be triggered only by an employee's receipt of a marketplace PTC and not by a PTC granted to their spouse or dependents. However, employers may see an indirect impact with more families dropping employer-sponsored coverage for newly subsidized ACA marketplace coverage.
Family members of some employees may be eligible for PTCs effective January 1, 2023, if coverage under the group health plan is determined to be unaffordable under the final rule. Related Notice 2022-41 provides an additional permitted qualifying event to allow employees who participate in non-calendar year cafeteria plans to drop coverage for such family members mid-year so they can enroll in a qualified health plan through the marketplace. Certain conditions apply, and the plan must be formally amended to recognize this optional new qualifying event. Interested employers who sponsor non-calendar year cafeteria plans should consult with their document providers and carriers, as applicable, regarding the possible adoption of such an amendment.
November 8, 2022, UPDATE. The IRS revised its guidance to remove the non-calendar year requirement from the new mid-year election event. Now both calendar year and non-calendar year plan documents can be amended to allow participants to make prospective mid-year elections to take advantage of the fact that the family glitch is fixed. This mid-year election is limited in that it should only allow an employee to revoke prospectively an election of family coverage under a group health plan that is not a health FSA and that provides minimum essential coverage provided both of the following conditions are satisfied:
(1) One or more related individuals are eligible for a special enrollment period to enroll in a QHP through an Exchange or one or more already-covered related individuals seeks to enroll in a QHP during the Exchange's annual open enrollment period; and
(2) The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the related individual or related individuals in a QHP through an Exchange for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.
Generally, a plan that chooses to recognize this mid-year election event must be amended by the last day of the plan year in which the election changes are permitted. An amendment can be effective retroactively to the first day of the plan year if the plan operates in accordance with the amendment from the effective date and notifies participants. However, for a plan year beginning in 2023, the amendment deadline is the last day of the plan year beginning in 2024.