Washington Update: IRS Finalizes Rule Fixing the ACA "Family Glitch"

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.

Employer Takeaway

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.

Final Rule

Notice 2022-41