The family glitch is fixed - now what? Part one

Since the introduction of the Affordable Care Act, employers have been required to provide affordable healthcare coverage for employees, but not for employees’ spouses or dependents. While employees have retained the option to add dependents, the resulting higher premiums they’ve faced have made affordability, well, challenging.

What’s considered affordable coverage? As calculated by the IRS, an employee’s individual contribution subtracted from their coverage premium delivers a number that the IRS compares to that employee’s yearly income. If the total annual premium equals more than roughly 9-9.5% of the employee’s income, the IRS will provide a tax break for the employee to find coverage on the Marketplace. But there’s an issue.

The “Family glitch”

Until recently, the IRS wasn’t modifying this formula to take into account the number of family members on the employee’s plan, or how dependents would affect the plan’s supposed affordability. Due to this glitch in calculation, employees have been faced with a difficult choice: sign the whole family up for a costly employer plan, or seek out alternatives for family coverage on the Marketplace.

To add insult to injury in these cases, because the employee’s sponsored coverage is considered affordable by this messy IRS standard, the employee and the employee’s family also miss out on premium tax credits they could enjoy through the Marketplace, compounding their financial woes.

And this has been no small problem. The Kaiser Family Foundation estimates about 5.1 million people are affected by this glitch.

The glitch is fixed

Thankfully, in mid-October of this year, the IRS issued an update to their affordability calculations and fixed the glitch. The new structure is three-fold:

1. While employers still won’t be required to offer affordable plans to employee dependents, the employee’s coverage affordability will be calculated separately from their family.
2. The Marketplace will now compare the cost of the entire family’s premium against the family’s household income to determine affordability.
3. If an individual employee’s coverage is deemed affordable, the employee won’t be eligible for subsidies. However, if the coverage is individually affordable but not affordable for the family, they may qualify for premium tax credits.

This change went live in time for the 2022 Open Enrollment period and will be in place for 2023 plans beginning January 1.

So, what does this mean for agents?

The IRS decision to fix the glitch is obviously major news for the more than 5 million families who were affected by the discrepancy. But given the unfortunate circumstances of the previous structure, it could be news they’re unaware of.

That makes the first move simple. If you’ve got clients or potential clients who could benefit from the change, give them a call to discuss their options. While the under 65 open enrollment period runs through January 15, these updates also created a special enrollment period for those affected by the old standard. So, there’s plenty of time to work with your clients to craft a plan that will allow them to take full advantage.

And we’ve got a few ideas how. Next, we’ll take a deeper look at ways employees and families can make the most of their options, save on premiums, and meet their healthcare coverage needs.

Read part two here.