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Market Update: ACA Family Glitch Fix Final Rule – Compliance Considerations

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The Biden Administration released a final rule in October 2022, which closes the longstanding family glitch in the Affordable Care Act (ACA). The rule goes into effect on December 12, 2022, and it impacts Individual and Family Plan (IFP) coverage and employer-sponsored coverage effective in 2023.
 
ACA Family Glitch – Backstory
The family glitch centers around employees’ costs for spouse and/or dependent premiums on an employer-sponsored plan – and those spouses’ and dependents’ inabilities to obtain alternate subsidized IFP coverage on a state Exchange/Marketplace, utilizing Premium Tax Credits (PTCs).
 
Prior to the new “family glitch” fix rule, the ACA considered an employer-based offer of coverage to be affordable for an employee – and the employee’s entire family – if the lowest-cost “employee-only” premium did not exceed a certain affordability threshold (and coverage was offered to spouses and dependents, at any cost). The affordability threshold is indexed at 9.5% annually. For plan years effective in 2023, it is 9.12%. For plan years effective in 2022, it is 9.61%.
 
Prior to the new rule, if the lowest-cost “employee-only” premium (after employer contribution) does not exceed 9.5% (as adjusted) of a person’s pay (or the Federal Poverty Level), and Minimum Essential Coverage (MEC) of any cost is offered to spouses and dependents, then it is considered an affordable offer of coverage. When an affordable offer of coverage is made by the employer under these conditions, neither the employee nor the employee’s spouse or children may obtain subsidized Individual and Family Plan (IFP) coverage using a PTC.
 
As a reminder, PTCs are only available to individual and family applicants obtaining individual coverage on a state Exchange/Marketplace, such as Covered California, Nevada Health Link, etc.
 
Summary of new “Family Glitch” final rule
The new rule changes this definition of “affordability.” Going forward, spouses and dependents may now qualify for subsidized Individual and Family Plan (IFP) premiums using PTCs on a state Exchange – if only the employee’s coverage is considered affordable (but the family coverage is not).
 
The state Exchanges/Marketplaces will now perform three affordability determinations:
  1. The Exchange will determine if the applicant (employee) has been made an offer of affordable coverage by the employer (according to the “self-only” plan offered, if applicable).
  2. The Exchange will evaluate the cost of the related individuals’ premiums (spouse + dependents’ premiums), based on the cost of family coverage offered by the employer.
  3. The Exchange will evaluate the cost of related individuals’ premiums who have alternate offers of group coverage, made by another employer (if available).
 
Employees would be barred from accessing PTCs on a state Exchange if the employer makes an offer of coverage that is affordable to the employee, based on the “employee-rate.” However, if the cost to cover the family under the employer’s plan is unaffordable, then the family members would qualify for a PTC (but not the employee).
 
The family glitch fix does not impact affordability tests or offers of coverage under the ACA’s employer mandate whatsoever. Furthermore, at least for now, it does not require additional employer reporting.
 
Impacts on the Individual Market
The Biden administration estimates that approximately 5.1 million Americans are impacted by the family glitch, but it also estimates that only about 200,000 will gain subsidized Marketplace coverage under the new rule. The industry will have a better understanding of the fix’s utility after the conclusion of the 2023 plan year, once all PTCs are claimed and utilized.
 
Such “family glitch” fix may bring some challenges to the group market. Dependent “children” are younger and often healthier than older adults. If these dependents (and spouses) forgo coverage in the group plan and obtain coverage in the Individual Market utilizing a PTC, then the group plans may face new adverse selection challenges. Group plans may be left with a disproportionate amount of less healthy adults, while the individual Exchange plans may gain an influx of younger, healthier participants. Conversely, the move of healthier individuals into the IFP market may bring down IFP costs for coverage obtained on an Exchange. The resulting impacts of such changes will likely not be realized until the end of the 2023 plan year, at the earliest.
 
Families considering leaving the group plan (for a subsidized IFP plan) may find the IFP premium to be more attractive – but may not consider other unexpected challenges connected with the coverage change. Group plans are traditionally richer and more robust than IFP-market plans, with stronger provider networks.
 
Furthermore, “split families” are a new issue. If the employee elects the affordable group plan, but family members obtain alternate IFP-market plan (“splitting” from the employee’s plan), then the plans will likely have different networks, deductibles, out-of-pocket (OOP) maximums, etc.
 
Consumer education in this area is critical, as individual consumers may focus on the cost of the premiums only – rather than other related areas such as networks, benefits, cost-sharing aggregation, etc. And, remember, if the spouse has a qualifying offer of coverage from an employer, then the spouse (and maybe the spouse’s dependent children) is not eligible for subsidized IFP coverage utilizing a PTC.
 
Impacts on the Employer Market
While most impacts of the “family glitch” fix will not be realized until the end of the 2023 plan year, there are some preliminary concerns of which to be aware.
 
The first area of concern relates to carrier participation requirements. If carriers require a certain percentage of family members to be covered by a plan, there is a potential for some employer groups to fail to meet participation requirements – if enough spouses and dependents leave the employer-sponsored plans because of the new rule. Note that dependent participation requirements vary drastically among carriers, market segments, and states. Some carriers do not have dependent participation requirements at all.
 
Furthermore, if many spouses and dependents leave the group health market to obtain coverage in the IFP market, it is unclear how premiums may be impacted. However, increased premiums in the group market may be likely.
 
While the “family glitch” brings no employer reporting changes today, that may change in the future. The Internal Revenue Service (IRS) and U.S. Department of Health and Human Services (HHS) will likely need additional information to accurately process spouses and dependents who may now be eligible for PTCs, based on an employer’s offer of coverage.
 
No changes to ACA employer mandate
The “family glitch” final rule does not impact the ACA’s employer mandate whatsoever. Under the employer mandate, Applicable Large Employers (ALEs) must offer affordable health insurance coverage — that provides Minimum Value (pays at least 60% of benefits) and is at least Minimum Essential Coverage (MEC) — to all Full Time (FT) employees. ALEs must also offer at least MEC (at any cost) to FT employees’ dependent children up to age 26. The employer mandate does not require the ALE to offer coverage to spouses.
 
The National Association of Health Underwriters (NAHU) is pushing support of two federal bills that would allow ALEs the option of reporting offers of ACA-compliant coverage prospectively, instead of retrospectively (current process). This would help consumers understand their eligibilities for PTCs when enrolling in the plan, rather than at the end of the plan year.
 
Permissible Section 125 Changes
The “family glitch” final rule allows employers to amend their pre-tax Section 125 (“Premium Only Plan” – POP) rules, so employees’ dependents can take advantage of new PTCs. Normal IRS rules prohibit employees from changing their elections midyear, when funding premiums with pre-tax dollars (exception: qualifying life events).
 
Employers may voluntarily amend their Section 125 Cafeteria Plans to permit eligible dependents to drop their group coverage midyear, in favor of subsidized individual Exchange coverage. This allows employees’ spouses and dependents to enroll in IFP Exchange coverage effective 1/1 during the current Open Enrollment Period.
 
Employers are not required to allow these election changes. However, if they wish to permit such changes, they must inform employees of their rights to make a change in accordance with the new rule and adopt a formal plan amendment on/before the last day of the plan year in which the election changes are allowed. Consultation with an ERISA attorney or tax counsel is highly advised, to ensure full compliance with the law according to the employer’s own specific circumstances.
 
Timeline
The final rule was published on October 13, 2022, and goes into effect December 12, 2022. The individual Exchange Open Enrollment period begins November 1, 2022, for coverage that is effective January 1, 2023.
 
Exchange IFP coverage applicants may utilize the new “family glitch fix” PTCs when enrolling in coverage now, for coverage that is effective January 1, 2023, and later.
 

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