Since Inauguration Day, the Biden administration has been busy unwinding Trump administration health care initiatives by issuing executive orders, settling lawsuits challenging administrative actions, and issuing proposed regulations. Many health policy commentators, however, believe that the Biden administration must also fix one important Obama-era mistake: the family glitch. Doing so would promote President Biden’s priority of extending affordable coverage to millions of family members of low- and middle-income workers — primarily women and children — who are currently either uninsured or forced to pay high premiums.
What Is the Family Glitch?
An important provision of the Affordable Care Act (ACA) provides tax credits to lower- and middle-income people to help pay for health insurance premiums in the individual market. However, if people have access to certain other forms of coverage, they are ineligible for the subsidy. In particular, employees who are offered affordable and adequate employer-sponsored coverage cannot receive premium assistance.
Under the ACA, employer coverage is deemed affordable if the employee’s share of the premium does not exceed 9.83 percent of the employee’s household income. However, even if coverage for the employee’s family costs more than 9.83 percent of household income — which is often the case — the employee’s family is not eligible for premium assistance as long as “self-only” coverage for the employee does not exceed this amount. This is known as the “family glitch.”
Premiums for self-only coverage average $7,470 annually, while premiums for family coverage average $21,342. On average, employers cover 83 percent of single coverage, but only 73 percent of family coverage. An estimated 5.1 million people are affected by the family glitch. About 85 percent purchase insurance from an employer and another 6 percent buy coverage in the individual market. Nine percent — more than 450,000 people — are uninsured.
Many of these uninsured people would be eligible for premium subsidies under the ACA if not for the family glitch. In addition, many who purchase employer coverage would be eligible for less expensive, and often more comprehensive, coverage with lower cost sharing were it not for the family glitch. It is also likely that the individual health insurance market risk pool would improve, bringing down premiums for everyone, if employees’ families were allowed premium tax credits since they generally are quite healthy.
What is the Origin of the Family Glitch?
The family glitch was created by an IRS regulation issued in 2012. The IRS interpreted an ACA provision that defined affordability of premiums for employees’ family members in terms of the affordability of the employee’s “required contribution” for coverage. This section cross-referenced the individual mandate section of the ACA, which states that an individual employee’s “required contribution” means the employee’s contribution for self-only coverage. The IRS ignored a subsection of that definition that stated that if an individual is eligible for employer coverage because of a relationship to the employee, the determination of affordability should be made “by reference of the required contribution of the employee.” Since this subsection relates to family coverage, the most reasonable reading would be that the “required contribution” would be for family coverage. But the IRS determined it to mean that if the employee is eligible for affordable self-only coverage, the employee and entire family are ineligible for premium tax credits, even if the family coverage is unaffordable. Because the glitch was created by regulation, it can be fixed by regulation; new legislation is not necessary.
An alternative interpretation of those provisions would have permitted an employee’s family to obtain subsidies if family coverage were unaffordable. This approach was supported by members of Congress, consumer advocates, labor unions, and others in dozens of comments submitted on the proposed rule. The National Health Law Program suggested that “the determination of whether employer-sponsored coverage is unaffordable” should be based “on the employee’s contribution for family coverage.” First Focus said it was “inconsistent with the goals of the ACA” and the SEIU submitted a lengthy legal analysis showing that it was contrary to the ACA. In a subsequent IRS rule defining affordability for purposes of the individual mandate penalty, the IRS concluded that an employee’s family members would not be penalized if family coverage was unaffordable. Commentary since the 2012 regulation has called for eliminating the family glitch.
What Would the Effect of Elimination Be?
The elimination of the family glitch is particularly important in light of the American Rescue Plan. The ARP expands eligibility for premium tax credits for 2021 and 2022 to people with incomes above 400 percent of the federal poverty level (i.e., $51,520 for an individual), as long as they pay 8.5 percent of their income toward the premiums. It also increased premium support significantly for lower-income enrollees. But it failed to fix the family glitch.
Even if the family glitch were eliminated, some families may choose to retain employer coverage. This could allow them to continue to see providers who may not be covered by available ACA plans and would also allow the employee and family to have a single deductible and out-of-pocket limit. Many families, however, may switch to ACA coverage with substantial premium subsidies. Family members who are currently uninsured or purchasing insurance in the individual market would certainly be better off.
The Congressional Budget Office estimates that eliminating the family glitch would cost $4.5 billion a year. This is likely the reason the Obama administration interpreted the law as it did and did not fix the family glitch. But this amount is insignificant compared to the total cost of ACA coverage or the cost of the ACA expansion under the ARP. The time to eliminate the family glitch may have arrived.