IRS Final Rules Fix ACA “Family Glitch”

AT A GLANCE

• Eligibility for premium tax credits for family members purchasing Exchange coverage will now be based on the cost of family coverage, not the cost of employee-only coverage starting with the 2023 open enrollment season
• The new rules will be used to determine whether anyone in the household qualifies for a premium subsidy for Exchange coverage starting in 2023
• The final rules do not make any changes to the employer mandate
• The final rules do not change any employer reporting requirements, including on IRS Forms 1094-C, 1095-C, 1094-B, and 1095-B

What is the ACA "Family Glitch"?

Since it was enacted, the Affordable Care Act (“ACA”) has measured whether coverage is affordable based on the cost of employee-only coverage for purposes of eligibility for premium tax credits when family members were purchasing coverage on a Health Insurance Exchange (“Exchange”). As a result, coverage was deemed affordable when it was affordable for the employee even if it was not affordable for their family members, thus making those family members ineligible for premium tax credits for Exchange coverage. This became known as the “Family Glitch”.

Final Regulations Fix the “Family Glitch”

On October 11, 2022, the Treasury Department and IRS issued final regulations finalizing changes to how affordability is determined for family members of an employee who was purchasing Exchange coverage. Whether or not coverage is affordable impacts whether these family members are eligible for premium tax credits for the coverage being purchased on the Exchange. It is important to note that even though affordability for the family members will be based on the cost of family coverage, affordability for the employee is unchanged and remains based on the cost of self-only coverage. This may result in scenarios where the employee is not subsidy eligible, but the family members are.

The Treasury and IRS have confirmed that the final regulations do not affect any information reporting requirements for employers, including forms 1094-C, 1095-C, 1094-B and 1095-B. Additionally, the safe harbors an employer may use to determine affordability will still be in place. The final regulations do not change an employer’s responsibility to comply with the employer mandate.

The final regulations do not change the affordability determination for qualified small employer health reimbursement arrangements (QSEHRAs) or for individual coverage health reimbursement arrangements (ICHRAs). The Treasury and IRS stated that they will consider whether future guidance should be issued to provide an ICHRA affordability rule for family members separate from the current affordability rule for employees.

Next Steps

Employers will be relieved by the agencies’ confirmation that nothing in these final regulations affects their ACA information reporting requirements or makes changes to the employer mandate. As open enrollment season progresses, employees may have questions about what this “glitch fix” means for them. In anticipation, the Department of Health and Human Services (HHS) intends to revise the marketplace application to include new questions about employer coverage offers for family members; and updated materials to help consumers collect information from their employer. It is unknown at this time what information will be needed from employers. Paylocity will communicate that information as it becomes available.

Thank you for choosing Paylocity as your Payroll Tax and HCM partner. This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.