ACA | Is the IRS going to fix the “family glitch”?

The IRS has made a proposal that may help many families access additional ACA marketplace subsidies, and employers will predominantly be unaffected. If you are intrigued, read on.

The IRS issued a proposed rule on April 5, 2022 to close a loophole in the ACA policy affecting subsidies in the ACA marketplace. Currently, a family unit’s determination of ACA marketplace subsidy eligibility is based on the out-of-paycheck cost of Employee only coverage, and does not consider the additional costs for family coverage under an employer plan. As long as the Employee only coverage is deemed “affordable”, the entire family unit is ineligible for subsidies through the ACA marketplace, and the employer is not at risk for coverage mandate penalties. While this compromise made it somewhat easier for employers to comply with the employer coverage mandate, the language left many dependents paying significant out-of-paycheck costs to enroll in an employer plan, with no option for financial assistance in the ACA marketplace. This has come to be known as the “family glitch”.

So, what does this mean for employees and their families? The proposal would allow family members of employees to enroll in marketplace plans and potentially be eligible for subsidies, if the out-of-paycheck cost for the family in the employer’s plan is determined to be unaffordable. This could help a significant number of families that pay substantial amounts of money to stay on an employer’s plan.

What does this mean for employers? So far, nothing in the proposal would directly affect employers. The proposal does not change the ACA employer mandate for employees. Affordable coverage offers would remain based on the cost of employee only coverage, and there is no new mandate for families. However, this proposal could indirectly affect employers as many spouses and dependents may elect to enroll in the ACA marketplace plans instead of the employer plan. This also opens the door for more employers to encourage spouses and dependents off their plans by increasing the cost that they pay to stay on the plan. This could help lower paid employees that may be eligible for the marketplace subsidies, but potentially difficult for those with slightly higher family income who may just exceed the salary limitations for subsidies, and are left to pay higher out-of-paycheck costs for their families to remain on the employer plan.

Lastly, there is the question of how this proposed rule would affect the annual 1095-C reporting that employers are required to complete each year. With the need to determine employer plan affordability at the family level to determine eligibility for marketplace subsidies for employee dependents, this would appear to require additional detail in the employer reporting regarding the employee costs for family coverage. While this would not impact any employer mandate liabilities, it may add complexity to the annual 1095 reporting process.

Stay tuned. With the 60 day comment period ending in mid-June, more information will be coming regarding this proposal this summer.