On October 13, the Biden administration published a final rule to fix the so-called family glitch. The new rule will enable millions of family members of low-income workers — primarily children and women — to newly qualify for financial help under the Affordable Care Act (ACA). The new rule is highly consistent with a proposed rule from spring 2022 that was supported by the majority of commenters, including children’s advocates, patient advocates, provider representatives, insurers, employers, and state officials. Family members who qualify will have the option to enroll in subsidized marketplace coverage beginning with the 2023 plan year.
What Is the Family Glitch?
Under the ACA, individuals generally do not qualify for marketplace premium tax credits if eligible for “affordable” job-based coverage. An employer’s plan is not “affordable” if the employee must contribute more than about 9.5 percent of household income toward premiums. If an employer’s plan is “affordable,” the employee cannot receive premium tax credits.
The “family glitch” refers to a 2013 rule in which the Internal Revenue Service (IRS) determined that an employee and their family members were ineligible for premium tax credits if the employer offered affordable employee-only coverage. This was true even if the employer offered family coverage that was unaffordable. As a result, the cost of family coverage was not considered when determining whether job-based coverage was “affordable” for spouses and dependents.
This interpretation left about 5 million mostly low-income Americans ineligible for premium tax credits and was criticized by members of Congress, consumer advocates, and other stakeholders. Most who fell in the family glitch were children and many were family members of workers at smaller businesses who are asked to contribute more than $10,000 annually for family coverage. While most people who fell in the family glitch enrolled in employer plans, they did so at a high cost. On average, families were paying nearly 16 percent of their income toward premiums. Given this, a diverse array of health care stakeholders called on the Biden administration to revise the interpretation that created the family glitch.
New Rule Fixes the Family Glitch for 2023
The IRS revised the 2013 interpretation by creating a new affordability test for family members. Under the new rule, employer coverage is affordable for family members if the employee’s contribution toward that family coverage is less than about 9.5 percent of household income. If an employee’s contribution exceeds this amount, their family members will be eligible for marketplace subsidies.
The new rule does not affect an employer’s responsibilities under the Affordable Care Act’s employer mandate, which requires certain employers to offer coverage to their employees and dependents. Employers that fail to do so could face penalties, but penalties are triggered only when an employee receives premium tax credits. Under the new rule, an employee who receives an offer of affordable employee-only coverage will still be barred from marketplace subsidies, but their family members will not.
Qualifying family members will be able to take advantage of this new option beginning with the 2023 plan year. HealthCare.gov and state-based marketplaces are working to implement these changes ahead of the 2023 open-enrollment period, which began on November 1. Implementation efforts include incorporating new questions into the marketplace application, developing materials to help consumers collect information from employers about the cost of family coverage, providing training to assisters and direct-enrollment entities, and conducting outreach and education. The IRS also intends to update various forms, publications, and websites ahead of the 2023 tax filing season.
Finally, the IRS affirmed that employer plans must cover 60 percent of health care costs and provide substantial coverage of physician services and inpatient hospital services. The latter requirement was adopted after media coverage suggested that employer plans were not covering these major categories of care. If an employer fails to offer family coverage that meets this standard, family members are eligible for premium tax credits even if family coverage is affordable.
What to Expect
The Biden administration estimates that 1 million people will enroll in subsidized marketplace coverage because of the new rule. This figure is low because of the assumption that most families will prefer a single employer plan over separate plans (i.e., a job-based plan for the employee and marketplace coverage for the rest of the family). Separate plans mean additional complexity in terms of premiums, deductibles, and provider networks.
Families that take advantage of this new option could see significant savings. One analysis suggested that a typical family of four with an income of $53,000 would save more than $4,000 in premiums, although exact savings will vary by income, cost of job-based coverage, location, and other factors. The rule is expected to have no effect on employer premiums or decisions to offer or subsidize family coverage. The rule will cost the federal government an average of $3.8 billion per year.
The new rule provides more affordable coverage options for families who will benefit from the enhanced marketplace subsidies made available under the American Rescue Plan Act and extended through the end of 2025 by the Inflation Reduction Act.
