June 2, 2022
by Eli Neuman, Marsh McLennan Agency’s Director Strategic Initiatives
What is the family glitch?
The “family glitch” refers to a gap in “affordable” health care coverage that is not accounted for in the Affordable Care Act (ACA). Under the ACA, employees must be offered at least one medical/Rx plan where the cost of single coverage is affordable. A plan is considered “affordable” if the single coverage option generally costs less than 10% of the employee’s income. The IRS sets this percentage each year and for 2022 the amount is 9.61%. There’s a lot more in the details here around determining affordability – but we’ll keep it simple for this discussion.
If the employer offers affordable single coverage, that employer satisfies the affordability requirements in full. Meaning, there is no requirement to offer affordable coverage to the employee’s eligible family members. If an employee is not offered affordable single coverage from their employer, they might be eligible for premium tax credits on the public health insurance exchanges. For lower paid employees this provides them an affordable option via the public exchange, in lieu of coverage through their employer. But if the single coverage is considered affordable, both the employee and their family members become ineligible for the premium tax credits.
So this glitch means that an employer could offer affordable single coverage to employees, charge a substantial amount to cover their dependents and remain compliant with the ACA’s affordability requirements. This could leave employees with a high cost of covering their dependents and no way to obtain premium tax credits on the exchange. To provide context let’s look at Mercer’s 2021 Survey of Employer-Sponsored Health Plans, nationally across all size groups, employers pay on average 81% of the single coverage premium in comparison to 74% for family coverage.
What’s the fix?
The Treasury Department and the IRS proposed that family members of employees who are offered affordable single coverage, but unaffordable family coverage, may qualify for premium tax credits on the public exchanges. If the proposal takes effect then the eligible family members (other than the employee themselves) may be eligible for financial assistance in the ACA marketplace.
The proposed rule would not change how the employee is treated. Meaning, if the employer does not offer affordable single coverage, then the employee could receive premium tax credits.
Public comments are due to the agencies by early June and the IRS will hold a hearing on the proposed rule on June 27.
If this proposal is accepted, these regulations would take effect starting January 1, 2023.
What does this mean for employers?
Although these proposed regulations open up possible premium tax credits to more Americans as a result of how much an employer is charging for coverage, the employer has no additional compliance burden or penalties for NOT offering affordable family coverage.
This may create opportunities for employers who are looking for ways to reduce cost in their health plan.
What enrollment impact will the family glitch have on employers?
The new proposal could lead to fewer family members relying on the employer’s health plan for coverage. Employers could see a reduction in the number of members covered under their plans – depending on how expensive the premium contributions are for dependent coverage compared to the benefits and related premium on the exchanges.
Yet again, there will plenty of families who choose to remain with their employer-sponsored plans for ease, familiarity and favorable programs that might be embedded in the medical/Rx benefits program.
Will the family glitch save employers money?
Some employees may switch from family coverage to single coverage so that their spouses and dependents can take advantage of available premium tax credits.
According to Milliman’s 2022 Medical Index, the average cost to cover an employee in single coverage is about $5,800 (employer + employee premiums). The average cost to cover an average family of four is $25,500. Employers could save a significant expense by seeing a reduction in the number of employees covering their family members. Depending on the current enrollment mix and percent of premium that employers charge for single and family coverage, the employer could see a meaningful and sustained reduction in health plan spend.
As the example above illustrates, a 10% reduction in family enrollment (back to single coverage) reduces overall plan cost by 6% and the employer subsidized portion by 3%.
Employers will want to weigh the merits of adjusting their dependent tier contributions to influence movement out of their plan and evaluate a number of implications:
- Employee morale: How will employees respond to the availability of new subsidies for their family members? If an employer already has relatively high dependent tier contributions, there may be no need to adjust them. But if an employer is seeking to maximize the available subsidies to dependents currently on their plan, employees may view a contribution increase strategy negatively.
- Risk profile: How will the plan’s risk profile change if dependents are removed? If a significant portion of young and healthy dependents are taken off the plan, the average risk profile could be negatively impacted. While overall costs may decrease with reduced headcount, relative increase in morbidity may occur.
- Overall benefits philosophy: Many employers will maintain a strong position on helping employees and their families access high quality medical/Rx coverage as well as additional benefit programs offered in conjunction to the plan to help families better manage their physical and mental health. With the current race for talent, employers may find offering comprehensive and affordable plans to the entire family to be a differentiator to attract and retain employees.
- Communications: An effective communication campaign is necessary to outline employee options and rationale for this approach, as well as an understanding of the possibility that an employee’s family may have multiple health plans covering different family members.
During the 60-day public comment period, interested parties can submit inquiries and suggestions to the agencies (through June 6, 2022). The IRS will be holding a public hearing on the issue on June 27. The proposal does not address funding for the expanded ACA marketplace subsidies. If the rule is finalized, the expanded financial assistance would be available for ACA plan coverage starting January 1, 2023.
- The White House. “FACT SHEET: Biden Harris Administration Proposes Rule to Fix “Family Glitch” and Lower Health Care Costs”, available at https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/05/fact-sheet-biden-harris-administration-proposes-rule-to-fix-family-glitch-and-lower-health-care-costs/, accessed 15 May 2022.
- Cynthia Cox, Krutika Amin, Gary Claxton, and Daniel McDermott. “The ACA Family Glitch and Affordability of Employer Coverage”, available at https://www.kff.org/health-reform/issue-brief/the-aca-family-glitch-and-affordability-of-employer-coverage/, accessed 15 May 2022.
- Internal Revenue Service. “Affordability of Employer Coverage for Family Members of Employees”, available at https://www.federalregister.gov/documents/2022/04/07/2022-07158/affordability-of-employer-coverage-for-family-members-of-employees, accessed 15 May 2022.
- 2021 Mercer National Survey of Employer-Sponsored Health Plans
The Patient Protection and Affordable Care Act is a complex law. Any statements made by Marsh & McLennan Agency, LLC concerning tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as accounting, tax, or legal advice. We recommend that you seek the advice of your own tax, accounting and legal advisers as to whether or not the health plans you select are compliant with the Patient Protection and Affordable Care Act, including the minimum essential coverage requirements.