Proposed Regulations Fixing the “Family Glitch” – Considerations for States
Jason Levitis, Urban Institute
On April 5, 2022, the Treasury Department and the Internal Revenue Service (IRS) released proposed regulations to address the so-called “family glitch” under the premium tax credit (PTC). The family glitch prevents certain dependents of employees from qualifying for PTC, and by extension for advance payments of PTC (APTC) and cost-sharing reductions, through the Affordable Care Act’s (ACA’s) Marketplaces.
Addressing the family glitch is an important step towards making affordable health insurance universally available. The glitch has left millions of people without any affordable healthcare options. Fixing it has long been a key priority of state health officials and other stakeholders.
But the change will also create new work for states. The rule would take effect for plan year 2023, leaving Marketplaces with little time to prepare application systems, consumer support, and outreach in advance of this fall’s open enrollment period.
The proposed regulations also include a few related and clean-up changes to other PTC rules. Comments are due June 6, 2022.
The Family Glitch Explained
To minimize disruptions to the existing health insurance landscape, the ACA generally confined PTC eligibility to people who lack other good coverage options. An offer of employer-sponsored coverage (also known as employer-sponsored insurance, or ESI) prevents PTC eligibility only if the ESI is deemed “affordable,” which means the employee’s cost to enroll (referred to here as the “premium”) does not exceed a certain percentage (9.61% for 2022) of household income.
The family glitch turns on the question of which premium this affordability test uses. There is broad agreement that an employee’s PTC eligibility is based on the premium for ESI for the employee only (aka, self-only coverage). By contrast, providing affordable coverage to the employee’s dependents requires tying their PTC eligibility to the family premium. But regulations finalized in 2013 provided that family members’ eligibility is tied—unintuitively—to the premium for self-only coverage. In other words, if self-only coverage is deemed affordable but family coverage is deemed unaffordable, the whole family is ineligible for PTC. Since this rule leaves family members without an affordable coverage option, it has been dubbed the “family glitch.”
The Proposed Regulations
The proposed regulations would reverse this interpretation and tie PTC eligibility for family members to the premium for family ESI. The family for this purpose comprises any members of the employee’s “tax unit” [that is, the taxpayer, spouse (if filing jointly), and any dependents] who are eligible to enroll in the ESI. Under long-standing rules, an ESI offer does not interfere with PTC eligibility for people outside the employee’s tax unit who are eligible to enroll—for example, adult children under age 26 and domestic partners. Taken together, this means potential enrollees outside the tax family would be considered separately—excluded for determining the family ESI premium, and not denied PTC by the employee’s ESI offer.
The regulation notes that this approach is both a better interpretation of the statutory language and more consistent with the ACA’s goal of providing affordable coverage. Overall, the rule is straightforward and does not include unnecessary complexities that could have been considered, such as tying the family premium to only those family members not eligible for other coverage.
The regulation also includes an important conforming change: it provides for the first time that dependents may not be denied PTC by a family ESI offer that fails to provide “minimum value,” which is a measure of plan generosity. The minimum value rule has long applied to the employee. Extending it to dependents creates parity and protects them against losing PTC due to inadequate ESI. These changes will have no impact on employer mandate liability, since under the ACA the penalty is triggered only when employees, not their dependents, get PTC.
The proposed rule also codifies in Treasury regulations the long-standing requirement that coverage must provide hospital and medical services to meet the minimum value standard—a rarely needed but important backstop. And finally, it includes a provision outside the ESI space—it codifies in regulation the long-standing IRS policy that receipt of post-filing premium rebates does not generally affect PTC for the year. This means, for example, that consumers who receive medical loss ratio rebates after the coverage year ends need not amend their tax returns or otherwise repay PTC to account for the reduced premium.
Impact on Affordability
The proposed rule would substantially expand access to affordable coverage. The Urban Institute estimated last year that a rule of this sort would make 4.8 million more people eligible for PTC, including 2.2 million children. About 800,000 people would switch to more affordable coverage, and another 190,000 would gain coverage rather than being uninsured.
To understand the change, consider a family of three with income of $50,000 per year and the opportunity to enroll in self-only ESI for $1,200 per year or family ESI for $7,500 per year. Under the current rule, the entire family is ineligible for PTC because the $1,200 for self-only coverage is 2.4 percent of income—well below the 9.61 percent threshold. But this leaves the family with two unaffordable options: spending $7,500—15 percent of income—for family ESI, or purchasing Marketplace coverage without subsidies, which would likely cost more than $10,000 (20% of income).
Under the proposed rule, PTC eligibility for the dependents is based on the family ESI premium of $7,500, or 15 percent of income. Since that exceeds 9.61 percent, the dependents may be eligible for PTC. Based on their income, with APTC they can purchase a benchmark silver plan for about $2,000 out of pocket (4% of income)—and they could likely purchase a gold or bronze plan for even less. The employee still can’t get PTC. But combining Marketplace coverage for the dependent with the “affordable” self-only ESI, the entire family can be covered for $3,200 for the year, or 6.4 percent of income.
The 2023 effective date creates a tight timeline for Marketplaces. While relatively straightforward, the rule does require a change in application architecture: instead of asking only for the self-only premium, Marketplaces will need to ask for both premiums, and then determine eligibility separately for employees and dependents.
The regulation makes clear that the federally-facilitated marketplace (FFM) plans to be ready to implement the new rule in time for the coming open enrollment period, and also that CMS “intends to take all necessary steps to support efforts by [state-based Marketplaces (SBMs)] to implement any changes before the open enrollment for 2023 coverage.” Nonetheless, the timeline could be challenging given that SBMs are already facing a perfect storm of implementation work, including the upcoming unwinding of the Medicaid continuous coverage requirement, regulatory changes in the recent Notice of Benefit and Payment Parameters, and state-level policies—as well as uncertainty about the extension of American Rescue Plan tax credit provisions.
Consumer Outreach and Education
The proposed rule also creates a range of new communications work for states. First, states must inform consumers made newly eligible of the new rules. The vast majority of individuals currently caught in the family glitch purchase the “unaffordable” ESI they are offered; others are uninsured. Either way, Marketplaces generally have no means of directly reaching this group, or even identifying them. Nonetheless, there could be opportunities to get the word out in partnership with the employer community, which may be looking for ways to help employees access affordable health coverage while also reducing spending on ESI. Messaging during open enrollment that reinforces the availability of new plans, new prices, and the impact of financial help will continue to be important in encouraging consumers, including those now eligible for this coverage, to check out their options.
Marketplaces must also work through how to clearly communicate the new rules and options to consumers, both in application materials and through customer service and assisters. A key challenge will be helping consumers choose where to enroll. Some families with APTC-eligible dependents may be better off keeping the family together either on the Marketplace or in ESI to avoid paying two premiums and having two deductibles, or for coordination of care. The best course for each family will depend on their specific circumstances, which could make it difficult to give advice.
Other State Considerations
With rate-setting season approaching, state insurance regulators will need to consider the family glitch fix as a potential factor affecting rates for 2023. The low expectations for migration between the group and individual markets suggest that any impact would be quite small. The Urban Institute projects just a one percent reduction in individual market premiums, and no meaningful impact on the group market. Nonetheless, regulators will want to keep the dynamic in mind.
States will also need to consider the new rules in developing or updating actuarial analysis for section 1332 waivers. Again, the impact will generally be quite small, but it could be larger for certain specific policies.
Fixing the family glitch is an important step towards providing affordable healthcare options, and a key priority of state healthcare officials. The short runway to 2023 will bring these benefits sooner but also require state officials to move quickly with implementation.