Feds take action to fix the ACA “family glitch”

Executive summary:

  • Last week, the United States Department of Treasury and Internal Revenue Service (IRS) issued final regulations concerning the affordability of family coverage. Specifically, the rule states that the eligibility of an employee’s spouses and dependents to receive tax subsidies for ACA marketplace (the “Exchange”) health coverage will be based on the affordability of the offer of family coverage through the employer group health plan.

  • The rule, effective January 1, 2023, clarifies that for an offer of coverage to meet ACA minimum value standard the plan coverage must provide a 60% actuarial value and must provide “substantial coverage” of inpatient hospital services and physician services.

  • The new rule does not change an employer's obligation under the ACA employer mandate, nor does it impact an employer’s ACA reporting obligation.

  • The IRS also released guidance creating another allowable mid-year election change for cafeteria plans. Employers may amend their Section 125 plan to allow participants to drop their family coverage in order for spouses and/or dependent children to enroll in ACA marketplace coverage.

Fixing the “family glitch”

The Biden administration has finalized regulations (opens a new window) under the Affordable Care Act (ACA) to allow more employees’ family members the ability to obtain subsidies and credits for coverage through the ACA Marketplaces, also known as Exchanges. Effective January 1, 2023, the ability of spouses and dependent children to qualify for subsidized coverage will be based on whether the offer of coverage by an employer is affordable for those family members, not just the employee.

Lockton comment: The “affordability” threshold of 9.5% of household income is adjusted annually for inflation. For 2023, that threshold is 9.12%.

Prior to the implementation of these regulations, the employees’ family members would be disqualified from obtaining subsidies for ACA Marketplace coverage if the employee-only coverage offered to the employee met minimum value requirements and was affordable. In short, the affordability of the family coverage was irrelevant in determining qualification of family members for subsidized Exchange coverage; family members were frozen out of subsidies based only on the affordability of the employee-only coverage.

This rule now allows spouses and dependent eligibility for tax subsidies to be based on the affordability of family coverage or other variations of coverage beyond employee-only, including employee plus spouse or employee plus dependents.

What about the ACA employer mandate?

Does this impact an employer’s obligation under the ACA employer mandate? No.

The new rule does not expand employers’ obligations under the ACA’s employer mandate. These new rules do not require the employer to make an offer of affordable coverage that meets minimum value standards to spouses anddependents of ACA full-time employees to avoid penalties under the ACA.

Lockton comment: The ACA employer mandate is comprised of two prongs. To avoid penalties under the ACA, employers subject to the employer mandate must make an offer of coverage to ACA full-time employees that 1) provides at least minimum essential coverage to ACA full-time employees and their dependent children, and 2) provides employee-only coverage that provides minimum value and meets affordability requirements.

The employer obligation does not change, nor does the employer’s ACA reporting obligation. Employers will still report the required information related to the employer offer of coverage on forms 1094-C and 1095-C.

What about non-dependent children?

The ACA requires group medical plans offering coverage to employees’ children to offer that coverage to children until their 26th birthday (effectively, until the end of the month in which the child turns 26), regardless of the dependency status of the child. These rules provide that when determining the affordability of coverage offered to an employee’s children, the cost of covering a non-dependent child is not considered.

Lockton comment: This will be more relevant to individuals who are eligible under plans offering coverage tiers tied to specific numbers of dependents (e.g., employee-plus-one, employee-plus-two, etc.) than to plans offering an employee-plus-family tier where the employee’s premium for family coverage does not change with two or more enrolled children.

Speaking of minimum value

The new rule went on to clarify that minimum value under the ACA requires the plan to meet a 60% actuarial value as well as to provide “substantial coverage” of inpatient hospital services and physician services. Additionally, the coverage offered to an employees’ spouses and dependents must provide minimum value to those spouses and/or dependents to disqualify them from obtaining subsidized coverage on the Exchange.

Lockton comment: Both the IRS and the Department of Health and Human Services (HHS) have previously issued guidance clarifying that the employer’s plans must include coverage of inpatient care as well as physician visits. The clarification was in response to some plans purporting to meet the ACA minimum value standards while failing to provide a certain level of benefits to plan participants.

The IRS provides a corresponding election change

In tandem with the release of the final regulations, the IRS issued guidance providing employers the option to amend their current Section 125 plan to allow employees to make a mid-year election change… specifically to drop the employee’s spouse and/or dependents so they can enroll in ACA marketplace coverage. In order to qualify for the mid-year election change, the spouse and/or dependents must be eligible to enroll in Exchange coverage during the Exchange’s annual open enrollment or qualify for a special enrollment opportunity to enroll in the Exchange coverage, and the election must correspond with the enrollment in the Exchange.

Lockton comment: Section 125 allows employers the ability to provide benefits on a pre-tax basis, subject to certain requirements. One such requirement is that the employees who elect to pay for benefits on a pre-tax basis are locked into those elections for the duration of the plan year, unless the employee experiences a qualifying life event.

Employers who choose to amend their plans to incorporate this mid-year election change can do so effective January 1, 2023. Plan amendments must be made on or before the last day of the plan year in which the change applies, and the IRS will allow the employer to amend and provide a retroactive effective date for the amendment. However, for plan years beginning in 2023, the amendment can be made on or before the last day of the plan year beginning in 2024.

Note though, new election changes made in accordance with the guidance may only be given a prospective effect applicable to future salary reductions.

Lockton comment: Lockton will provide a model Section 125 amendment in 2023.

What does the future hold though?

It is highly likely these regulations will face legal challenge on the grounds the IRS exceeded their regulatory authority in promulgating this rule. Stay tuned.

What is the employer’s move?

This new rule might have some employers considering increasing the cost of spousal and dependent coverage in an effort to allow the employee’s family to qualify for subsidized coverage, and as such, to come off of the employer’s group health plan.

Lockton comment: These rules may come too late for many employers with calendar year plans who are in the process of finalizing open enrollment materials. Making changes now may be a hurdle many don’t want to attempt this late in the 2023 planning process.

Employers considering going down this path of increasing the cost of coverage for family members will want to have discussions with their partners about the potential impact to the employer’s group health plan as well as potential unintended consequences that might result from the change in the cost of coverage.

Lockton comment: For example, increasing the cost of family coverage could drive “healthy” spouses and dependents to obtain subsidized coverage through the Exchange resulting in a less healthy risk pool remaining on the employer’s group health plan.

Employers who opt to increase the cost of family coverage mid-year might be opening the door for employees to opt out of the plan. A “significant cost” increase mid-year could trigger a mid-year election change under the Section 125 rules allowing employees to drop coverage mid-year based on the increase, regardless of family members enrolling in the Exchange. Employers will want to check their Section 125 plan documents to determine if the change might open the door for employee election changes.

Communicate plan changes

If an employer opts to increase the cost of coverage to allow spouses and dependents access to subsidies, they will want to clearly communicate the change to employees as well as how the change in the employer-provided coverage provides the opportunity for spouses and dependents to obtain subsidized coverage on the Exchange.

Proper communication might help reduce any employee questions and/or friction due to the increased cost of coverage.

At the end of the day…

Employers should work with their brokers and vendor partners to determine the best course of action for their employer-sponsored group health plan and take the necessary steps to amend the plan as needed and communicate those changes.

Full alert (opens a new window) Not legal advice: Nothing in this alert should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton Companies are not privileged under the attorney-client privilege.