IRS Issues Final Regulations Extending ACA Affordability Beyond Employee-only Coverage

By: HUB’s EB Compliance Team

Historically, if an employer delivered a compliant ACA mandate health coverage offer to an employee, then children and spouses of the employee were blocked from ACA subsidies. ACA rules thereby created a “family glitch” that precluded family members from subsidy eligibility even if the cost of adding dependents to the employer plan far exceeds the affordable cost.

Back in April we wrote about the Internal Revenue Service (“IRS”) proposed regulations extending affordability requirements under the Affordable Care Act (“ACA”) beyond employee only coverage. As expected, those proposed rules have now been officially finalized to coincide with the upcoming ACA marketplace open enrollment season.  The final rule ends the so called “family glitch” and expands the number of individuals potentially eligible for federal tax credits (Premium Tax Credits; “PTCs”) to purchase coverage through the marketplace. The final regulations are effective on December 12, 2022 (however, as a practical matter the effective date is January 1, 2023, based on the marketplace coverage cycle).

Note: This IRS change solely alters family access to federal marketplace coverage subsidy funding but DOES NOT expand the employer mandate to include family coverage or otherwise increase employer penalties.

The New Rule

The final regulations largely leave in place the changes included in the proposed regulations.  Employers will continue to measure affordability for employee only coverage based on whether the employee’s contribution towards the lowest cost, employee-only coverage does not exceed 9.5% (as adjusted) of the employee’s household income. Affordability for family members of the employee will be based on whether the employee’s contribution towards the lowest cost, family coverage does not exceed 9.5% (as adjusted) of the employee’s household income

Employer Penalties

Notably, these regulations do not expand employer mandate obligations or penalty risks. Employer penalties hinge on whether the employee received a PTC, not whether the spouse or dependent children received a PTC. Instead, this new expanded affordability requirement only relates to federal tax subsidy eligibility. In other words, if an employer were to offer affordable employee-only coverage, but unaffordable family coverage, the spouse and dependent children would now become eligible to receive a PTC, but such PTC family member access would not trigger an employer penalty.

Employee Family Members Defined

The final rule keeps the proposed rule definition of which family members are included for purposes of assessing whether coverage is affordable. Specifically, only the employee’s family for tax purposes would be included in determining whether coverage is affordable. This potentially excludes adult children of the employee who are eligible for coverage under a parent’s employer plan, but no longer the tax dependent of the employee. This will make assessing affordability a challenge as a dependent child’s age suddenly becomes a key, but not the only consideration, and employee circumstances will vary. Moreover, age alone is not the sole determinant as IRS rules for tax dependents hinge on a range of technical factors. This means that an 18-year-old child of one employee may no longer be a tax dependent, while a 22-year-old child of another employee remains a tax dependent.

Cafeteria Plan Elections

At the same time the final regulations were released, the IRS also released IRS Notice 2022-41. Beginning in 2023, this notice allows participants to drop employer health coverage and switch to exchange coverage when they qualify for subsidized ACA marketplace coverage. In order for this to apply, the individuals being dropped from the employer plan must be either eligible for special enrollment through an exchange or seeking to enroll in coverage during the exchange’s annual open enrollment period. Additionally, the change in the plan election must correspond to the intended enrollment for the individuals being dropped in coverage through the exchange no later than the day immediately following the last day of coverage under the employer plan.

Plans may rely on the employee’s reasonable representation regarding enrollment or intended enrollment in marketplace coverage. Cafeteria plan documents must be updated no later than the last day of the plan year in which the election change is allowed with amendments to take advantage of this IRS change in status option. 

Potential Impact to Employer Plans

As a result of the expanded eligibility for federal tax credits, employer plans may see a decrease in enrollment of spouses and dependent children in their health plans. Employers with lower paid employees are most likely to see decreases in enrollment, especially if those employees have family members to cover, or if their family premiums are high. Since tax credit eligibility is based on household income, it will be difficult for employers to prepare for any specific drop in enrollment. Additionally, while some employers may be pleased with a decrease in enrollment, they should understand the individuals who no longer enroll will have varied claims experience, thus a decrease in enrollment may or may not positively impact the plan.

The new rule does not change a plan sponsor’s ability to impose a spousal surcharge, or a spousal exclusion based on access to other coverage. The new rule does give family members facing an exclusion or surcharge new options to avoid the impact of such plan designs.

ACA Reporting

The IRS went out of its way in the Final Rule preamble to explain that nothing in the final regulations affects Form 1095-B and Form 1095-C reporting. Moreover, the IRS does not intend to revise those forms to require any additional data elements related to the new rules. This offers welcome news to employers that could have been exposed to ACA Reporting penalties for incorrectly showing family member affordability. Many industry experts anticipate hearing more about IRS reporting duties in subsequent years.

Conclusion

The new affordability requirement for family coverage is a substantial change for employers, employees, and their families. Employers should understand that despite this substantial change, they do not face any additional penalty risks.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.