Family Glitch Fixed

IRS kills the "family glitch"

A new Treasury regulation was finalized in October 2022. It changes the rules used to determine whether an offer of employer-sponsored coverage is affordable to the spouse and dependents of an employee. It is meant to address the family glitch.

It took effect on December 12, 2022. In time for 2023 open enrollment.

What was the family glitch?

Before this new regulation took effect, the affordability of an employer-sponsored coverage (for employees as well as their spouse and dependents) was determined based on the cost of employee-only coverage.

Not the cost of family coverage. This was an unintended event so it was dubbed a “glitch” in the ACA.

• If the cost of employee-only coverage was affordable, then no one in the household could qualify for a premium tax credit, even if the family premium through the employer would be unaffordable.

♦ About 5 million people were affected by the family glitch with a large portion being children who did not qualify for Children's Health Insurance Program (CHIP).

Determination of affordability was changed

Employer-sponsored coverage is considered affordable if the employee’s share of the premium is less than or equal to 9.02% of the employee’s household income in 2025. This changes every year.

♦ Beginning with the 2024 plan year, affordability of employer-sponsored coverage for an employee’s family members is based on whether the employee’s premiums for family coverage – not employee-only coverage – are affordable for the household.

Previously only the cost of the employee’s coverage was considered. This change now opens the possibility that family members may be able to qualify for Premium Tax Credits (PTC).

There is a little stumbling block for the employee. The employee will still be subject to determination of affordability for employer-sponsored coverage for the employee.

• If the employee-only cost is less than or equal to 9.02% of the employee’s household income in 2025 then the employee would be expected to purchase coverage through the employer and not be able to receive PTC.

Still, this is a big change that will help many families.

Affordability of family coverage

To determine whether a spouse or dependents have an offer of affordable coverage, divide the employee’s share of the premium for family coverage offered by the employer by household income.

• If greater then 9.02% than the coverage offered by the employer is not affordable and the family is eligible for PTC.

• If less than 9.02% then the family coverage is affordable and the family will not qualify for PTC. Purchasing through the employer may be the best option.

Spouse might have offer through her employer

If multiple family members have offers of employer-sponsored coverage, perform these tests for each employer’s coverage offer(s).

• If a family member has any offer of affordable coverage – whether it is employee-only coverage or family coverage – then they are not eligible for PTC.

Some members of a household qualify for PTC

As a result of the new rule, it is possible that some people in the household will qualify for PTC while others will not.

For example, an employee could have an employer offer of affordable self-only coverage, while the employer’s offer of family coverage is not considered affordable.

In this case, the employee would not be eligible for PTC, but the other members of their tax household would.

Should family members consider enrolling in separate plan?

• The employee could enroll in employer-sponsored coverage while their family members enroll in marketplace coverage with PTC. This is the most common scenario.

• The employee could enroll in full-cost marketplace coverage (without PTC) and their family members could enroll in marketplace coverage with PTC. This is likely to end up costing more since most employers provide some financial support for their health plans.

• The whole family could enroll in employer-sponsored coverage, although this is likely the most expensive option since there would be no PTC to help offset costs.

Does the new regulation apply to very state?

This change applies in every state, regardless of whether the state uses HealthCare.gov or its own marketplace.

• State-based marketplaces have their own timelines for implementation, and some have workarounds in the interim.

You may need to call the marketplace or resubmitting an application if it looks like you qualify for PTC based on this change. Check with your state’s marketplace for details.

Already enrolled in an employer-sponsored plan

Family members who are newly eligible for PTC due to the change in the affordability test can choose a marketplace plan during open enrollment which runs from November 1 through January 15 in states that use HealthCare.gov.

• If a person is enrolled in employer-sponsored coverage that ends in a month other than December, they will qualify for a Special Enrollment Period (SEP) up to 60 days before the last day of the plan year or 60 days after the last day of the plan year.

• If a person is enrolled in employer-sponsored coverage and experiences a decrease in income that makes them newly eligible for PTC, they will qualify for an SEP for up to 60 days after the date their income changes. They must have had coverage for at least 1 day in the 60 days before the date of the income change.

• If a person (including a family member of an employee) becomes newly eligible for PTC because of a change in employer-sponsored coverage, which includes a change in premiums that affect whether coverage is considered affordable, then the person will be eligible for an SEP. The SEP begins 60 days before the change to their employer-sponsored coverage and ends 60 days after the change to their employer-sponsored coverage.

Received a raise

My employer’s coverage is now considered affordable. What happens?

People who have an unaffordable offer of employer-sponsored coverage when they submit their marketplace application and are receiving PTC will not need to repay PTC if their income increases during the year such that their employer-sponsored offer would be considered affordable.

This is a safe harbor for people in this situation. However, the next year when they renew coverage they may not qualify for PTC.

Example calculation

Jane earns $30,000 a year and her employer offers coverage. She files taxes jointly with her spouse, Paul, who makes $20,000 a year, and does not have an offer of employer-sponsored coverage. Their total household income is $50,000.

Jane and Paul claim their son, Peter, as a dependent. Jane's employer-sponsored coverage satisfies minimum value requirements and her premium for self-only coverage costs $3,000. However, the cost of family coverage for Jane, Paul and Peter is $6,250.

Under the old affordability calculation, based on the cost of coverage for Jane alone, Paul and Peter would be ineligible for PTC. Jane’s premium for self-only coverage – $3,000 – does not exceed 9.02% of their total household income of $50,000.

♦ However, for coverage beginning in plan year 2025, Paul and Peter would qualify for PTC, since their premium for family coverage – $6,250 – is 12.5% of their household income, easily exceeding the 9.02% threshold for 2025.

Jane would still not be eligible for PTC because premiums for her self-only coverage does not exceed 9.02% of household income.