The IRS recently issued final regulations on the use of Premium Tax Credits (PTCs), resolving the “family glitch” and extending PTC eligibility beyond individuals to family members.
As a result, individuals and their spouses and dependents will be able to obtain much more affordable coverage through a state or federal ACA marketplace. This will be the case whether they’re covered under an employer-sponsored health plan, or they’re foregoing coverage because the family premiums cost too much.
Currently, employer-based health insurance is defined as “affordable” based on the coverage just for the employee, not for their family members. The “family glitch” is that family members with limited income are ineligible for a PTC to obtain an ACA marketplace plan.
Here’s an example: Stephen’s Pizza Parlor extends an offer of coverage to Michael, a full-time kitchen manager. The offer to Michael is affordable for himself, but not for his wife and two children. As a result, Michael’s family is able to obtain a PTC from the state health exchange. To reduce paperwork and maintenance, Michael opts to decline the offer from his employer and instead joins his family in obtaining coverage through the exchange.
Because of the final IRS regulations, beginning in 2023, employee spouses and dependents will be eligible for financial assistance through the ACA marketplace, if coverage for the family as a whole costs more than 9.12% of household income under the lowest-cost employer-sponsored option. For greater context here, 9.12% is the ACA affordability threshold for the 2023 tax year.
When an employee receives a PTC, the tax information is relayed to the IRS and cross-referenced with an employee’s 1095-C. The IRS can determine if an employer extended affordable, sufficient coverage to its employees after examining the details. If not, the agency can send a penalty to the employer via Letter 226J.
As a result of the new regulations, some 1 million new Americans “will either gain coverage or see their insurance become more affordable,” according to a statement issued by the White House. This figure includes uninsured people as well as insured dependents moving from employer-offered coverage to marketplace coverage.
However, this projection is well below the estimated 5 million people who fall into the “family glitch,” as not all family members are likely to enroll in marketplace coverage. This is because some might prefer to keep all family members on one employer-offered plan rather than split them up between that and a marketplace plan. Who are these 5 million Americans? About 2.8 million of them are children, half of whom are low-income.
Impact on employer ACA reporting
Fortunately, the final regulations do not alter employers’ annual ACA reporting requirements, at least not directly.
The IRS states in the final rule 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.” Adding that it “does not intend to revise Form 1095-B or Form 1095-C to require any additional data elements related to the new rules.”
To ensure affordability for employees and their families, employers can conduct the following affordability test. As defined under the ACA, an employer’s plan isn’t affordable if the employee has to contribute more than about 9.5% of their household income toward premiums.
The final rule doesn’t change the affordability test for the employee; it does, however, add a new and separate minimum value test for family members. The plan’s share of total allowed costs of benefits provided to the family member must be at least 60%, and the plan needs to provide substantial coverage of inpatient hospital and physician services.
Considerations for Applicable Large Employers (ALEs)
So, what happens if an employer offers coverage to an employee and their family, yet the coverage remains unaffordable for the employee’s spouse and dependents?
The employee and their family members may be less likely to enroll in employer-sponsored coverage, and instead, obtain PTCs from the ACA marketplace (if not for affordability purposes, then simply for less management of coverage, as shown in Michael’s example above). One can presume that a family would like to share coverage, for ease of access, convenience, and logistics.
As we’ve noted in previous articles, PTCs enable Americans to maintain ACA subsidies obtained through state and federal health exchanges, but they’re also the trigger for the IRS issuing penalty assessments via Letter 226J.
With the “family glitch” effectively solved, we can anticipate greater PTC participation in ACA health exchanges. More PTCs issued, means more ACA non-compliance penalties for employers.
The IRS is currently issuing Letter 226J for the 2019 tax year. All-in-all, the agency has issued billions in penalties to employers that failed to comply with the ACA’s Employer Mandate, and ACA penalty assessments issued for non-compliance are increasing for the 2023 tax year.
You can download the 2022 ACA Essential Guide for Employers to get a better understanding of ACA compliance, and your responsibilities under the healthcare law’s Employer Mandate:
To gain invaluable insights on penalty amounts, affordability percentages, filing deadlines, expert tips for responding to penalty notices, and proven strategies for minimizing IRS penalty risk, download the ACA 101 Toolkit.