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The Affordable Care Act’s family glitch is fixed – for now

The IRS has published a final rule that fixes that family glitch. The rule, which becomes effective on January 1, 2023, permits spouses and dependents covered under an employer-sponsored health plan – or those who go without insurance due to expensive premiums – to use premium tax credits when purchasing on-Marketplace coverage.

Under current regulations, employees and their dependents are not eligible to use premium tax credits if the employee has access to an employer plan that meets the affordability standard, or a plan whose self-only coverage does not exceed 9.12% of the employee’s income.

The new rule replaces the self-only language, and allows premium tax credits to be used when the lowest-cost coverage for the whole family would cost more than 9.12% of household income. A recent White House statement estimates that one million Americans will either gain coverage, or gain access to cheaper coverage, as a result of the fix.

Impacts on employees, spouses and dependents

Many families will likely opt-out of expensive employer-sponsored coverage, but some may choose to stay on. These families may find it easier to manage their health spending by having the entire household on one plan. Other families battling chronic conditions may find better drug pricing on an employer-sponsored plan. However, if premium costs are a significant concern for the household, opting into Marketplace coverage may be the preferred route. In any case, health insurance agents should be well-prepared to help families weigh their options.

Impacts on employers

The rule does not change the mandate for large employers to offer coverage to employees and dependents. Employers will also not be liable for penalties when family members take advantage of this fix, as penalties are only triggered when employees receive premium tax credits. To be clear, the rule only makes dependents eligible for premium tax credits; not employees.

The rule has no impact on ACA reporting requirements. No additional forms will be required, nor will existing ones be modified.

Legal challenges on the horizon

Some in Congress believe that the IRS overstepped its authority in drafting this final rule, arguing that only the legislature has the ability to modify this segment of the ACA. Employer associations, like the U.S. Chamber of Commerce, fear that the fix will cause healthy individuals to leave employer-sponsored plans in favor of lower-cost individual plans. They argue that the increased risk would put upward pressure on premiums and cause additional disruption to labor markets.

Final thoughts

Even though the rule goes into effect on January 1, 2023, this is an issue worth watching until the legal disputes are settled. Should the rule stand as written, some of your clients will have some tough decisions to make when deciding whether to enroll some or all of their family in employer-sponsored coverage. They’ll need you there to guide them through the nuances of this complex regulatory landscape.