IRS Resolves the “Family Glitch” and Expands the Change-in-Status Rules for Cafeteria Plans
In October of last year, the IRS issued Final Regulations (the “Final Rule”) that resolve an issue under the Affordable Care Act (“ACA”) known as the “family glitch.” In connection with the Final Rule, the IRS also released Notice 2022-41 which expands the change-in-status rules for coverage under employer-sponsored Internal Revenue Code (the “Code”) Section 125 cafeteria plans to include prospective changes in coverage for an employee’s family members who become eligible for coverage under the Health Insurance Marketplace (the “Exchange”).
By way of background, Code Section 36B provides a premium tax credit (“PTC”) for taxpayers who satisfy certain eligibility requirements, such as enrolling in a qualified health plan through the Exchange. If an individual is eligible for “affordable,” minimum value employer coverage for a given month, no PTC is allowed for the individual for that month. Code Section 36B further provides that coverage is deemed to be “affordable” if the employee’s required contribution for employee “self-only” coverage does not exceed 9.5% (indexed annually) of the employee’s household income, regardless of how much the employee’s annual premium would be for family coverage.
The so-called “family glitch” refers to the fact that if the cost of self-only coverage is deemed affordable, no PTC is allowed for the Exchange coverage of the employee’s family members even if family coverage through the employer’s plan costs more than 9.5% (as indexed) of household income.
The Final Rule resolves the “family glitch” by providing that affordability of employer-sponsored coverage for the employee’s family members is determined based on the employee’s share of the cost of family coverage rather than the employee’s share of the cost of “self-only” coverage. Importantly, this affordability determination is only for the purpose of establishing eligibility for the PTC and does not impact the affordability determination for the purpose of the IRS assessment against Applicable Large Employers of an employer shared responsibility payment under Code Section 4980H(b).
Notice 2022-41 (the “Notice”), issued in connection with the Final Rule, provides that a Code Section 125 cafeteria plan may allow an employee to prospectively revoke coverage under an employer-sponsored group health plan (other than a health FSA) for a family member if (i) the employee’s family member is eligible to enroll in a qualified health plan through the Exchange during a special enrollment or annual open enrollment period and (ii) the family member’s coverage under the Exchange plan is effective no later than the day following the last day of coverage under the employer’s plan.
Notably, an employee is now able to drop coverage for their family members without having to revoke their own coverage under the employer’s plan. This guidance is effective for elections made on or after January 1, 2023. Employers wanting to include this optional change-in-status rule in their cafeteria plans for the 2023 plan year must amend their plans on or before December 31, 2024. The amendment may be effective retroactively to the first day of 2023, provided that the cafeteria plan operates in accordance with the Notice and the employer informs participants of the amendment.