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Hmm, They’re Tinkering with the Affordable Care Act Again?
The "Glitch"
With particularly partisan posturing, the papers opined, preceding the President’s press conference:
Opinion: Biden finally moves to fix one of Obamacare’s most glaring problems (Washington Post
White House Press Secretary Asks Reporter Chanting ‘Kill, Kill, Kill’ If He Has An Actual Question (The Onion)
What is this group health care “glitch”? Is it (or its “fix”) grounds for revolution, like the tyrannical Tea Tax, or is it instead nothing more than a tempest in a tea pot?
As we all know by now, you can become eligible for the ACA marketplace subsidy if you have not been offered an “affordable” health plan with “minimum value” (i.e. at least 60% of actuarial value). Under present regulations, employees’ family members are deemed to have been offered an affordable plan of minimum value where the employer’s offer of self-only minimum value coverage is considered “affordable” – in other words, irrespective of whether it may be “affordable” with respect to the family members themselves or not. Hence, the “glitch”.
Coverage is considered “affordable” to the employee if the employee is not required to pay more than 9.5% of household income for self-only coverage under the least expensive minimum value coverage offer made by the employer. This “affordability” threshold of 9.5% of household income (basically, adjusted gross income on the employee’s Form 1040) is adjusted annually for inflation. For 2022, that threshold is 9.61%. It will likely be significantly higher in 2023, the first year in which the newly proposed rules are expected to apply. Existing regulations provide that if the least expensive self-only, minimum value coverage offered to the employee is considered “affordable,” then the coverage offered to the employee’s spouse and dependents is also deemed to be affordable, even if the cost of family coverage requires the employee to spend more than 9.5% (adjusted for inflation) of household income on that coverage. This deeming rule is called the “family glitch” because the deemed affordability of employer-based minimum value coverage renders the spouse and other dependents ineligible for ACA marketplace subsidies, no matter how unaffordable their employer-sponsored coverage offer really is to the family unit. The result of this is that many employers have had to keep the employee premium share for dependent coverage relatively low because the dependents could not “depend” on the ACA marketplace for subsidized medical insurance.
Under the proposed reinterpretation, the affordability of employer-based minimum value coverage for an employee’s spouse will be determined based on whether the employee’s premium cost for employee-plus-spouse coverage, under the cheapest minimum value offering made by the employer, falls within the affordability boundary. Similarly, affordability of minimum value coverage for an employee’s children, or spouse and children, will turn on whether the employee’s share of premium for employee-plus-children, or employee-plus-family (as applicable), under that cheapest minimum value offering, falls within the affordability boundary.
So much jargon – what does it mean?
An example might be useful here. In 2023, when the affordability threshold is 9.75% of household income, Paul’s[1] employer, CHOAM, Inc., offers a minimum-value plan to Paul and his family. Paul’s 2023 household income is less than four times the federal poverty level (where subsidy eligibility ends), and his premium share for self-only coverage under the least expensive minimum value coverage offered by CHOAM doesn’t require Paul to spend more than 9.75% of household income. Thus the coverage is “affordable”, and if Paul declines CHOAM’s offer of coverage, Paul would not be eligible to obtain subsidized coverage in the ACA marketplace.
Paul’s wife, Chani, however, has not been offered affordable minimum-value coverage from her employer, Fremen Industries, Ltd., nor has she enrolled in any coverage that, were she enrolled, would disqualify her from subsidy eligibility (i.e., any coverage more substantial than a health FSA). For Paul to cover himself and Chani in 2023 under the cheapest minimum value employee-plus-spouse coverage tier offered by CHAOM, Paul would have to pay a premium of 10.5% of household income, which would far exceed the assumed 2023 affordability threshold of 9.75%.
Under the statutory interpretation reflected by current regulations, the spousal coverage offered under CHOAM’s plan would be “deemed” affordable because Paul’s offer of self-only coverage would be “affordable”. Thus, Chani could decline spousal coverage under CHOAM’s plan, but would not qualify for ACA subsidized marketplace coverage. (Glitches within glitches!). But, according to the newly proposed regulations, the “deeming” rule would be eliminated, meaning that Chani could have her marketplace coverage subsidized because Chani’s premium cost for the cheapest minimum-value employee-plus-spouse coverage tier under the CHOAM plan exceeds 9.75% of her household income. Paul, meanwhile, would still have his “affordable” offer of minimum-value coverage because his premium cost for the cheapest minimum-value self-only coverage remains affordable, meaning no ACA subsidies for Paul.
Employer Upshot
What does this mean for employers? Something closer to the teapot than to Boston Harbor. Remember that the dreaded Employer Shared Responsibility Penalty[2] for violating the ACA’s “employer mandate” is only triggered when an employee receives premium tax credits through the marketplace. Since 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. That is, the rules would not require employers, under threat of penalty, to offer “affordable” minimum value coverage to spouses and dependents of ACA full-time employees.
Returning to our example, the fact that Chani would become eligible for ACA marketplace subsidies in 2023 has no impact on CHOAM’s responsibilities under the ACA employer mandate for that year. That mandate will continue to require, under threat of penalty, an offer of minimum value and affordable coverage only to ACA full-time employees, not to their spouses or dependents. The same analysis would apply to coverage of Paul and his children under the cheapest, minimum value, employee-plus-children tier of the ABC plan, and to coverage of Paul, Chani, and the twins under the cheapest, minimum value, employee-plus-family tier of that plan, where the premium cost to Paul under those tiers exceeds 9.75% (our fictional affordability threshold) of Paul’s household income in 2023. Paul would remain ineligible for ACA marketplace subsidies in 2023, but Chani and the children would qualify for those subsidies, assuming they had no other offers of minimum value and affordable coverage and were not enrolled in any disqualifying medical coverage. The family members’ qualification for marketplace subsidies in 2023 would not affect CHOAM’s obligations under the ACA’s employer mandate for that year.
Planning Considerations
What might result? If the rules are adopted substantially as drafted in final form, employers may begin to price spousal and dependent coverage at a level high enough to drive spouses and dependents to ACA marketplaces where their cost of coverage, net of federal subsidies, would be cheaper than the employer’s pricing. Employers will definitely want to consider any nondiscrimination consequences of this strategy (notwithstanding 30 years of near-complete lack of regulatory interest under Tax Code Sections 105 (self-insured healthcare plans) and 125 (pretax contributions for healthcare coverage)). Because the ACA marketplace household subsidy diminishes with increases in household income, it might make more sense to raise the price of spousal and dependent coverage for non-highly paid employees than it will to raise the price for highly paid employees, but to raise the price for the former and not the latter triggers the nondiscrimination issue. Even if federal regulators seem uninterested, due diligence lawyers for a buyer in a corporate transaction would likely take notice.
Three laws can never be broken: (1) Murphy’s, (2) the Second Law of Thermodynamics, and (3) the Law of Unintended Consequences. Yes, increasing dependent costs share rates is one lever to pull, but how might that, for example, affect corporate culture? Would this decision be in line with a company’s mission, vision, and values? How would CHOAM, Inc. be positioned in terms of attracting the best employees if CHOAM increases dependent cost share rates and Fremen Industries, Ltd., keeps their premiums more “affordable”?
While the IRS did not include an estimate of the rule's potential impact on the coverage market, the Biden administration estimated that 200,000 uninsured people would gain coverage and up to one million could see their coverage become more affordable. The IRS will accept public comments for 60 days and hold a public hearing on June 27 to discuss the proposed changes. If finalized, the rule would go into effect on January 1, 2023, meaning the subsidies would be available to people during the annual open enrollment period.
[1] The author of this article is currently re-reading the entire 9-book Dune series by Frank Herbert, and begs the indulgence of those for whom science fiction is not their cup of tea by forgiving the occasional reference, say, to the ACA as “Sarducare”.
[2] I am aware that ESRP is purported to stand for “Employer Share Responsibility Provisions”, but let’s not kid ourselves…