The IRS recently finalized regulations that change the eligibility standards for the Affordable Care Act’s (ACA’s) premium tax credit. This is important news if your organization is an applicable large employer (ALE) under the ACA, or will be in 2023, and there’s any chance your health care coverage won’t be considered “affordable” and of “minimum value” next year.
The family glitch
Under the ACA, if an ALE doesn’t offer minimum essential coverage that’s affordable and provides minimum value to its full-time employees and their dependents, the employer may be subject to a penalty. This penalty is triggered if at least one of its full-time employees receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”).
In 2022, employer-sponsored coverage is considered affordable if the required employee contribution for self-only coverage doesn’t exceed 9.5% of the employee’s household income. This threshold is indexed annually for inflation.
Historically, minimum value has been determined solely by reference to the employee’s coverage. Regulations provided that, if self-only minimum value coverage under an employer-sponsored plan is affordable for an employee, then the coverage is also affordable for a spouse with whom the employee is filing a joint return and any dependents who may be eligible to enroll in the employer’s coverage.
Accordingly, neither the spouse nor dependents would qualify for a premium tax credit — regardless of the required employee contribution for their coverage or whether their coverage provides minimum value. This has been sometimes referred to as “the family glitch.”
A new interpretation
The IRS has concluded that the ACA should be interpreted to require separate affordability determinations for employees and for their related individuals. Thus, as amended, the final regs provide that an eligible employer-sponsored plan is affordable for related individuals — thereby disqualifying them from a premium tax credit — only if the required employee contribution for family coverage doesn’t exceed 9.5% (or the indexed amount in future years) of household income.
For this purpose, family coverage means all employer plans that cover any related individual other than the employee, including a “self plus one” plan. The final regs also establish a separate minimum value rule for related individuals.
Ultimately, regardless of a plan’s cost, related individuals will no longer lose eligibility for the premium tax credit if the offered employer plan didn’t provide them affordable and minimum value coverage for the period in question. In addition, the IRS finalized a regulation that expands the definition of minimum value to require substantial coverage of inpatient hospital services and physician services.
Related IRS guidance was also issued allowing certain additional cafeteria plan election changes. Consult your benefits advisor for further details on these.
Some things remain the same
These final regs don’t affect the ACA’s information-reporting requirements, and safe harbors that employers may use to determine affordability are still available. Our firm can help you manage the tax and information-reporting complexities of offering health care coverage.