October 12, 2022
Final rules base eligibility for premium tax credit on cost of covering family
In final regulations (TD 9968) under IRC Section 36B, the Treasury and IRS allow family members of an employee with an affordable offer of employee-only health insurance coverage to qualify for premium tax credits (PTCs), which they can use in purchasing coverage through the health care marketplace exchange if the employer's family coverage does not meet the affordability definition. This closes the so-called family glitch by amending the determination of the PTC to base the affordability of employer-sponsored minimum essential coverage on the cost of covering the employee and covered family members, not just the employee.
Notice 2022-41, released simultaneously with the regulations, allows employees to revoke coverage for family members in an employer plan associated with a non-calendar year cafeteria plan so the family members may enroll in a qualified health plan through the health care marketplace. Employers planning to allow employees to revoke coverage as permitted by this new guidance must amend their plans to allow for the revocation.
The final regulations apply to plan years beginning after December 31, 2022; for taxpayers who enroll, or enroll a family member, in individual health insurance coverage through the health care marketplace; they are effective December 12, 2022.
The final regulations adopt the proposed regulations with minor changes (see Tax Alert 2022-0582). The IRS received 3,888 comments in response to the proposed regulations.
Under IRC Section 36B, individuals are eligible for a PTC if, among other requirements, their employer has not offered them affordable coverage that provides minimum value (i.e., the premiums exceed an indexed percentage of household income — 9.61% in 2022). Current regulations consider family coverage affordable if the employee's self-only coverage is affordable.
IRC Section 4980H, which was added by the Affordable Care Act (ACA), imposes excise taxes (commonly known as the employer mandate penalty) on applicable large employers (ALEs) if a full-time employee enrolls in coverage through a state-provided or federal health care marketplace and receives a PTC under IRC Section 36B.
The final rules expand PTC eligibility by basing the affordability determination on the required contribution for family coverage, rather than self-only coverage. The affordability rule will only be changed for family members, not for employees. As a result, a spouse or dependent could have an offer of employer coverage that is unaffordable even though the employee has an affordable offer of self-only coverage. Thus, family members could be eligible for PTCs, but the employee would not.
The final regulations also extend the minimum-value rule to include coverage of family members. Thus, the minimum-value requirement would be met if an employer plan covers at least 60% of the total allowed costs of the family members' benefits, similar to the existing rule for employees. The final regulations confirm that an employer plan providing minimum value to an employee also provides minimum value to family members if the scope of benefits and cost sharing (including deductibles, co-payments, coinsurance and out-of-pocket maximums) are the same for employees and family members. This also applies to the applicable tier of coverage based on how many family members are enrolled in the plan. The plan also must include substantial coverage of inpatient hospital services and physician services for the employee's family members.
The IRS clarified that the regulations do not change any information reporting requirements for employers under IRC Sections 6055 and 6056. The IRS also stated that it "does not intend to revise Form 1095-B or Form 1095-C to require any additional data elements related to the new rules." Finally, because the regulations only change the eligibility for family members, the change will not affect employer shared responsibility payments under IRC Section 4980H as those are based solely on the affordability of the employer's offer to a full-time employee and not to family members.
An employee whose employer maintains a health plan that provides for salary reduction via an IRC Section 125 cafeteria plan may find that the offer to the employee's family members is unaffordable based on these regulations. Because family members may be eligible for PTCs effective January 1, 2023, based on the affordability of the plan offer, the IRS made a corresponding change to the cafeteria plan rules through Notice 2022-41, which was issued simultaneously with the regulations. The notice authorizes cafeteria plans to permit employees to revoke coverage of family members in an employer plan associated with an IRC Section 125 cafeteria plan in the middle of a plan year so they can enroll in a qualified health plan through the health care marketplace.
Typically, an employee cannot change an election in the middle of a plan year without a "change in status." Before the notice, a "change in status" did not include an employee discontinuing coverage of family members during a plan year solely so they could enroll in a qualified health plan. Under the notice, however, this change is considered a "change in status," which permits the employee to revoke the family coverage in the middle of a plan year. This change only applies to those plans with a plan year other than the calendar year.
The notice applies to elections effective on or after January 1, 2023. Employers choosing to allow revocations consistent with the notice must amend their cafeteria plans to comply with this new guidance on or before the last day of the plan year in which the elections are allowed and the amendment can be retroactive to the first day of that plan year. An employer cannot amend a plan to allow an election to retroactively revoke coverage.
The implications for large employers may be minimal. The ACA's reporting requirements and employer mandate rules will not change. The minority of employers that maintain cafeteria plans on a non-calendar year basis will need to amend their plans if they wish to permit employees to revoke coverage for family members who can take advantage of the expanded availability of PTCs starting January 1, 2023.
For employees about to embark on open enrollment for 2023, there are new considerations in deciding the most cost-effective way to cover family members. It may be that employees who had previously covered family members through the employer-provided coverage can find lower-cost coverage using newly available PTCs.
While it is likely too late for employers to modify offerings for the 2023 plan year, it will be interesting to see how the pricing of employer-provided coverage is affected by family members' access to ACA exchanges, particularly if family members qualify for PTCs at no additional cost to the employers.