Fixing the Family Glitch, What the Final Rule on Family Affordability Means for Employers

Since its passage in 2010, the Affordable Care Act (ACA) has reshaped the landscape of employer-sponsored health coverage. One longstanding issue within the legislation, commonly known as the “family glitch,” created a gap in affordable coverage options for many families. While this flaw primarily impacted employees and their dependents, its recent revision raises important questions for employers navigating ACA compliance.

In this blog, we’ll explore what the family glitch is, what has changed and what it means for employers moving forward.

What is the ACA's 'family glitch?'

The ACA was signed into law on March 23, 2010. Among the many provisions of the ACA were the requirements for employers with 50 or more full-time workers or equivalents, also referred to as applicable large employers (ALEs), to offer health care coverage that met certain criteria or face steep penalties. Fast forward to 2013, the “family glitch” arose when the Internal Revenue Service (IRS) released clarification of regulations related to the affordability requirements of coverage offered by ALEs.

Who is affected by the "family glitch' fix?

Also created by the ACA, the Healthcare Exchange, a marketplace and enrollment service for medical insurance and the access point for premium tax credits for those who are eligible and enrolling in the exchanges. Individuals who are offered coverage from their employer that meet minimum essential coverage, minimum value and affordability standards are generally ineligible to participate in the exchange and receive any type of premium tax credit. The affordability regulations released by the IRS in 2013 clarified that coverage would be deemed “affordable” based on the employee cost of coverage. An employee and family members would be ineligible to receive a premium tax credit in the exchange if the employee-only cost of coverage was deemed affordable. This is does not factor in how expensive the cost of family coverage may be.

For nearly a decade, this regulation has caused a hardship on lower income families, and as a result low-income families often choose to forego coverage and care. Proponents of this change have lobbied through three presidential administrations to see a fix enacted. The great news for employers is that this change does not mean a direct increase in cost for them.

How the IRS proposed to fix the family glitch?

Under the IRS’s recently revised final rule, affordability for family coverage will be based on the cost of family coverage. This will mean that family members who are offered unaffordable job-based family coverage will be newly eligible for subsidized marketplace coverage. Though not all of the newly eligible are expected to do so, the final rule ensures that eligible family members have the option of enrolling in affordable marketplace coverage. Not all family members will in fact be eligible to enroll in the exchanges and they cannot have any other affordable job-based coverage available to them. For example, if both spouses work and both employers offer affordable coverage, neither spouse is eligible for a premium tax credit in the exchange. Their children may be eligible for a premium tax credit, if the family coverage offered at the parent’s employer is not affordable and the children are not working and offered affordable coverage. Each employee whose rate is affordable will need to remain on the employer-sponsored coverage and will not be eligible for a premium tax credit.

How will employees make changes in the middle of a plan year?

Along with the 36B revised rule on the family glitch fix, the IRS released Section 125 2022-41 guidance on amending premium-only plans to allow for changes effective on or after 1/1/2023. This guidance allows for non-calendar year premium-only plans to be amended to enable employees to drop family coverage mid-year for the purpose of making an election in the exchange. This is not a requirement for an employer to amend their plans, but something they would be allowed to do.

How will this impact employers?

The enforcement for the employer shared responsibility provisions of the ACA will still only be based on the cost of employee-only coverage, which does not impact employer affordability safe harbors and will not cause increased enforcement related to the cost of family coverage.

This is expected to open new affordable coverage options for families without increasing the burden for employers.

If you have any questions on this final rule, the new IRS Notice and how this may impact you or your clients contact your isolved Sales Executive.