Biden Administration Proposes To Fix The Family Glitch

On April 5, 2022, the Internal Revenue Service (IRS) issued a proposed rule to revise its current interpretation on eligibility for premium tax credits for families. This would, if finalized, fix the Affordable Care Act’s (ACA’s) so-called “family glitch” by extending marketplace subsidies to millions of people—primarily children and women—who are currently ineligible for financial help through the marketplaces. The proposed rule was accompanied by a fact sheet from the White House that also summarized other efforts by the administration to strengthen the ACA and Medicaid.

This change is not a surprise. The proposed rule flows from an executive order on the ACA and Medicaid issued by President Biden in January 2021 which hinted at the possibility of fixing the family glitch by directing federal officials to examine “policies or practices that may reduce the affordability of coverage or financial assistance for coverage, including for dependents.” And critics have long argued that the family glitch interpretation is inconsistent with the text, structure, and goals of the ACA and unfairly penalizes family members of lower-income workers. There is also broad support among a range of health care stakeholders to fix the family glitch: a majority of diverse health care stakeholders urged the Biden-Harris presidential transition team to revise the interpretation that created the family glitch.

The proposed rule should not affect liability under the employer mandate. Why? The employer mandate requires certain large employers to offer coverage to employees and dependents. But penalties for violating the mandate are triggered only when an employee receives premium tax credits through the marketplace. As discussed below, the proposed rule would extend marketplace tax credits to only the family members of workers who are not offered affordable job-based family coverage. It would do nothing to affect the eligibility of employees and thus should not implicate the employer mandate.

The proposed rule is expected to be published on April 7, and comments will be due in 60 days. The IRS will also hold a hearing on the proposed rule on June 27. Assuming the IRS finalizes the rule as proposed, the family glitch would no longer exist, and dependents who are offered unaffordable job-based family coverage could be eligible for more affordable marketplace coverage, beginning in 2023 (with enrollment to begin in November).

In addition to the proposed rule, President Biden signed a new executive order on additional ways to strengthen the ACA and Medicaid. Priorities include making it easier to enroll in and keep coverage, improving the generosity of benefits and access to care, expanding eligibility and lowering costs, and taking steps to help reduce the burden of medical debt. The fact sheet is here, and the executive order itself will be summarized in a separate article.

Background

What Is The Family Glitch?

Under Section 36B of the Internal Revenue Code, individuals generally do not qualify for premium tax credits if they are eligible for another source of minimum essential coverage, including employer-sponsored plans. There are two exceptions to this rule under the ACA—when the offer of job-based coverage is not “affordable” or not of “minimum value.” If either exception is met, an individual is ineligible for minimum essential coverage which in turn makes them eligible for premium tax credits.

Affordability Test

An employer’s plan is not “affordable,” as defined under the ACA, if the employee must contribute more than 9.5 percent of household income towards premiums. (This percentage was initially set at 9.5 percent and is adjusted annually; the threshold for 2022 is 9.61 percent. To avoid confusion, this article refers to the threshold as 9.5 percent throughout.) If an employer’s plan is not “affordable,” an employee may qualify for premium tax credits through the marketplace, and the employer may face penalties under the employer mandate.

The so-called “family glitch” stems from a 2013 interpretation by the IRS that whether an employer’s offer of coverage is “affordable” is determined based on the cost of employee-only (rather than family) coverage. This means that an employee and their family members are ineligible for premium tax credits when the employee is offered affordable employee-only coverage. This is true even if the cost of family coverage would otherwise be unaffordable (i.e., the employee’s contribution towards premiums for family coverage would exceed 9.5 percent of household income). Put simply, the employee’s share of the premium towards family coverage is currently not considered when determining whether job-based coverage is “affordable” for family members.

This situation—where employee-only coverage is affordable, but family coverage is not—is not uncommon. Most employers offer family coverage, but many do not subsidize it for family members which keeps the cost high for workers and their families. Data from the Kaiser Family Foundation’s 2021 Employer Health Benefits Survey shows that average premiums and employee contributions have increased significantly over time. In 2021, average premiums for employee-only coverage were $7,739, compared to $22,221 for family coverage.

On average, employees contribute 17 percent of the premium for employee-only coverage compared to 28 percent of the premium for family coverage. The average employee contribution for employee-only coverage was $1,299, while the average contribution for family coverage was $5,969 (an amount that has increased significantly over time). The average employee contribution rate is even higher at employers with a large share of lower-wage workers: employees in these firms contribute 35 percent of the premium for family coverage.

The interpretation of the ACA that created the family glitch was proposed in broader rulemaking in 2011. In the preamble to the proposed rule, the IRS noted that the premium tax credit statute—Section 36B(c)(2)(C)(i)—referenced part of the individual mandate statute found in Section 5000A(e)(1)(B). This part of Section 5000A refers to an employee’s premium contribution for employee-only coverage. This reference, the IRS reasoned, meant that the affordability test for both employees and family members is based on the employee’s contribution for employee-only (not family) coverage. The IRS also cited a 2011 analysis from the Joint Committee on Taxation (JCT) that interpreted the affordability test to be based on employee-only coverage.

The family glitch policy was not finalized alongside other related provisions in a final 2012 rule. Instead, the IRS noted only that commenters opposed the proposed interpretation and that the policy would be finalized in future regulations. It was ultimately finalized as proposed in a short 2-page rule from 2013 that reiterated the prior rationale regarding the cross-reference to Section 5000A(e)(1)(B). (This history, and the IRS’s prior rationale, is discussed in the preamble to the proposed rule.)

Many comments on both the 2011 proposed rule and the 2012 final rule—found here and here, respectively—urged the IRS to adopt an affordability test for family members based on the cost of family coverage. That interpretation was supported by members of Congress, consumer advocates, labor unions, and others including the National Health Law Program, First Focus, and SEIU who argued that the interpretation was contrary to, or, at a minimum, inconsistent with, the ACA.  

Minimum Value Test

An employer’s plan is not of “minimum value,” as defined under the ACA, if it fails to cover at least 60 percent of total allowed costs. To determine whether an employer’s plan satisfies this 60 percent threshold, employers use a minimum value calculator (among other methods) to measure the generosity level of the coverage.

While the statute does not specifically mention family members, the IRS previously interpreted Section 36B(c)(2)(C)(ii)’s minimum value requirement to extend to coverage for both employees and family members. As such, a family member who is offered job-based coverage that fails to provide minimum value is treated as ineligible for minimum essential coverage—and thus eligible for marketplace premium tax credits.

Separately, the IRS and the Department of Health and Human Services (HHS) provided guidance to clarify the coverage of inpatient hospitalization and physician services by job-based plans. This issue was initially addressed in a notice in 2014 after media coverage suggested that employer plans were not covering these major categories of care while still satisfying the 60 percent minimum value threshold. In this notice, the IRS and HHS noted that minimum value is met when plans satisfy the 60 percent threshold and include “substantial coverage” of both inpatient hospital services and physician services.

Following the notice, HHS proposed and finalized updates to its regulations on minimum value in the 2016 payment notice. The IRS followed with its own proposed rule in 2015. However, this IRS rule was never finalized.

Who Is Affected By The Family Glitch?

The IRS’s interpretation has barred an estimated 5 million Americans—largely the children of low-income workers—from receiving premium tax credits for marketplace coverage even when they would otherwise qualify based on household income. The Kaiser Family Foundation estimated that 5.1 million people fell into the family glitch in April 2021. Most (2.8 million) are children and nearly half of whom (46 percent) are low-income, earning between 100 and 250 percent of the federal poverty level.

A May 2021 analysis from the Urban Institute found that 4.8 million people would be newly eligible for premium tax credits if the Family Glitch were fixed and that nearly half of those affected are children. The Urban Institute also found that families who switched from job-based plans would save about $400 per person in premiums on average, with even greater gains ($580 per person) for those with incomes under 200 percent of the federal poverty level. These analyses built on prior studies from the Urban Institute, RAND, and the Agency for Healthcare Research and Quality, among others.

The Proposed Rule

The proposed rule—formally titled “Affordability of Employer Coverage for Family Members of Employees”—would: 1) change the affordability test for family members to be based on the cost of family (rather than employee-only) coverage; 2) clarify the minimum value rule for family coverage; and 3) clarify the treatment of rebates for purposes of premium tax credit eligibility. The “affordable” and “minimum value” tests would be changed only as they relate to family (but not employee-only) coverage. The proposed rule includes several new examples of how these the changes would be applied.

The IRS included a severability clause and most of the rule would, if finalized, go into effect for the next taxable year. The preamble notes that a final rule is “expected to be finalized no later than the end of this year,” meaning these changes would go into effect for 2023. The IRS has been working closely with HHS to ensure that the federal marketplace can implement these changes ahead of the 2023 open enrollment period, which begins in November. Federal officials would also support state-based marketplaces in doing the same.

Affordability Test For Family Coverage

Citing President Biden’s executive order, the IRS reexamined and has preliminary determined that there should be a separate affordability test for employees and family members. Under the current interpretation, the test is the same: employees and family members are equally barred based on whether the employee has an offer of affordable employee-only coverage. The proposed rule would adopt a separate test for family members such that affordability would be based on the employee’s contribution towards family coverage.

Specifically, an offer of job-based coverage would be affordable for family members if the portion of the annual premium that an employee had to pay for family coverage—i.e., the employee’s required contribution towards family coverage—were less than 9.5 percent of household income. The marketplace would assess 1) whether the employee has an offer of affordable employee-only coverage; 2) whether the family members have an offer of affordable family coverage; and 3) whether any of those family members have an offer of affordable coverage from another employer.

For these calculations, the relevant family members would be those in the employee’s tax family, meaning a spouse filing jointly or a dependent. Other family members—such as adult children up to age 26—might be offered job-based coverage. But, if they were no longer on the employee’s tax return, they would not be considered in the affordability test for family coverage. This is true regardless of whether that person enrolls in the coverage or not. So, enrollment of other individuals, even if it made the family coverage more expensive, would not be considered under the affordability test for family members. This issue is illustrated in example 4 under the proposed rule.

Family coverage would be defined as “all employer plans that cover any related individual other than the employee.” If an individual were offered coverage from multiple employers (whether as an employee or dependent), only one of those offers would need to be affordable to bar access to premium tax credits. An offer of affordable family coverage from any employer would make family members ineligible for premium tax credits. This is illustrated in examples 5 and 6.

The proposed rule would not affect the affordability test for employees, which remains unchanged. Employees would still be barred from accessing marketplace subsidies if their job offers affordable employee-only coverage, but their family members would no longer be.

The IRS would also make a conforming change regarding the “part-year period rule” which governs when an employee has a job for less than the full calendar year. This would extend the separate affordability test for employees and family members to those with only partial-year coverage.

The Justification

Assuming the proposed rule is finalized, the IRS would clearly be adopting a new interpretation and shifting its position relative to the Obama administration. While this might seem unusual, it is not. The Supreme Court has made clear that policy changes are permissible and expected, and agencies can reconsider prior interpretations to reflect new circumstances or a change in policy preferences. The IRS proposed rule acknowledges this change while also explaining its rationale for the revised interpretation.

Not only does the statutory text not compel the current interpretation, the IRS believes, but the proposed interpretation—to impose a separate affordability test for employees versus family members—is a better reading of the statute. This is because Section 36B(c)(2)(C)(i) is best interpreted in a way that accounts for the cost of family coverage and creates consistency across the IRS’s interpretations of the same statutory language.

(For those willing to follow along from a statutory perspective, the IRS is applying the “special rule” for family members in Section 5000A(e)(1)(C) to Section 5000A(e)(1)(B). These are statutes that govern the individual mandate. They matter here because Section 5000A(e)(1)(B) is incorporated by Section 36B(c)(2)(C)(i), which lays out eligibility for premium tax credits. The IRS proposes to read the reference to Section 5000A(e)(1)(B) in Section 36B(c)(2)(C)(i) as clarified by the special rule in Section 5000A(e)(1)(C), as it did in separate IRS rules regarding the individual mandate. In those rules, the IRS concluded that an employee’s required contribution towards family coverage, not employee-only coverage, dictated affordability for purposes of an exemption to the individual mandate. This makes sense because Section 5000A(e)(1)(C) explicitly says that it applies “for purposes of subparagraph (B)(i).”

Turning back to the family glitch, the IRS would adopt the same interpretation here: the “special rule” for family members in Section 5000A(e)(1)(C) modifies Section 5000A(e)(1)(B) and would carry through to the reading of Section 36B(c)(2)(C)(i).)

The IRS in the proposed rule also notes the need to promote consistency with other parts of the ACA, including Section 1411, which requires HHS to establish eligibility procedures for the marketplace. Section 1411(b)(4)(C), for instance, requires information about an employer’s lowest-cost option and how much an enrollee and family members must contribute towards that plan. If Congress intended the family glitch, it would have made little sense to require this information to be submitted.

Finally, the IRS asserts that the current interpretation—by undermining access to marketplace coverage for family members that otherwise qualify—is contrary to the goal of the ACA to expand access to affordable coverage. Federal officials have therefore proposed an alternative reading of the statute that would expand access to marketplace subsidies, consistent with the law.

Minimum Value Test For Family Coverage

The proposed rule also addresses parts of the minimum value test. First, the IRS would withdraw the proposed rule from 2015 related to substantial coverage of inpatient hospital services and physician services. Though that older rule would be withdrawn, this proposed rule would repropose the standards on inpatient hospital services and physician services for employees without substantive change—and would extend this standard to family members. This gives the public an additional opportunity to comment on these potential changes, which makes sense given how long ago the prior rulemaking was.

Second, the proposed rule would clarify the minimum value requirement for family members. As noted above, current federal rules help ensure that the coverage offered to both employees and dependents is of minimum value. But the IRS wants to further clarify this requirement by creating separate tests for minimum value: one for employees and one for family members.

If family members were not explicitly included, employers could potentially offer a plan that is affordable but does not provide minimum value—which would still bar family members from accessing marketplace premium tax credits. This result, the IRS notes, would be inconsistent with the goals of the ACA.

The proposed rule would thus maintain the current minimum value standard for employees: a plan provides minimum value for an employee only if the plan’s share of the total allowed costs of benefits provided to the employee is at least 60 percent and the plan provides substantial coverage of inpatient hospital services and physician services. But it would also adopt a separate minimum value test for family members. As proposed, a plan would provide minimum value for family members if the plan’s share of total allowed costs of benefits provided to the family member is at least 60 percent and the plan provides substantial coverage of inpatient hospital services and physician services.

The proposed rule would also adopt separate effective dates where the employee test remains in effect (as it is now) and the family member test would apply beginning with the next plan year.

Premium Refunds

The proposed rule would clarify how the receipt of a premium refund (such as a medical loss ratio rebate) owed from a prior year’s coverage might affect the amount of premium tax credits that a person is currently eligible for. In general, refunds from prior years should not count against the amount that an enrollee is otherwise eligible to receive for premium tax credits. This is because tax liability for a given year is based on events that occurred during that year. In general, the amount of premium tax credit that an enrollee is currently eligible for should not be affected by a premium refund paid in a later taxable year.

Implications

The preamble to the proposed rule does not include an in-depth economic analysis. This is because, the IRS notes, tax data does not reflect contribution amounts for family coverage. But federal officials solicit data, other evidence, and models to help with its analysis and refer to several of the studies noted above by referencing this prior Health Affairs Forefront analysis.

The White House estimates that fixing the family glitch as proposed would extend coverage to 200,000 uninsured people and reduce premiums for nearly 1 million Americans. This is consistent with the Urban Institute’s analysis from 2021, which expected about 710,000 people to enroll in subsidized marketplace coverage, leading to 190,000 fewer uninsured people. This is far below the 5 million people who are estimated to fall in the family glitch and suggests that not all family members would take-up marketplace coverage simply because it is available. This is because it might be preferable (financially or otherwise) for some families to remain on their job-based plan rather than have families split between two plans. “Premium stacking”—with job-based coverage for the worker and marketplace coverage for the rest of the family—means separate premiums, deductibles, and out-of-pocket maximums (and perhaps separate networks) that might also be expensive for families.

The IRS does address the proposed rule’s impact from a qualitative perspective, noting that millions of Americans may have been impacted by the current interpretation. Families with children may have faced economic hardship (from much higher premiums) or forgone coverage altogether. Affected families—especially those with low incomes—could see significant savings.

The IRS acknowledges that some employers could see an effect if some currently enrolled family members shift from job-based coverage to subsidized marketplace coverage under this change. However, the IRS believes take-up of the new marketplace coverage will be “modest,” and the Urban Institute expected no disruptions to the employer market. (As noted above, the proposed rule should not affect liability under the employer mandate.) In terms of impact on the marketplace risk pool, those in the family glitch are believed to be healthier than average. Thus, a shift to the individual market could, on average, reduce marketplace premiums for all by about 1 percent, according to the Urban Institute.

There might also be some “negligible” implementation costs for the IRS as well as one-time costs for federal and state-based marketplaces to update eligibility systems. The marketplaces, HHS, state Medicaid agencies, and enhanced direct enrollment partners might also face some administrative costs to update consumer applications and consumer-facing affordability tools. These administrative costs would likely be “modest,” and the IRS asks for comment to inform its estimates.