On April 5, President Biden, accompanied by former president Obama, proposed “the most significant administrative action to improve implementation of the ACA since its enactment”: a fix for the so-called family glitch. This glitch has to do with who is eligible to receive premium tax credits when buying health insurance on the Affordable Care Act’s (ACA) marketplaces. The law provides these tax credits to help people who do not otherwise have “minimum essential coverage” — such as employer coverage that is “affordable.” Affordable employer coverage is defined as costing no more than 9.5 percent of household income, adjusted for inflation (currently 9.61%). However, the current IRS rule considers coverage affordable for a family if the coverage for the employee only does not cost more than this amount. It does not consider the affordability of family coverage. As a result, family members of workers — primarily low-income workers — are ineligible to receive premium tax credits through the marketplace even when family coverage is unaffordable.
It is estimated that the family glitch affects about 5 million Americans, more than half children. About 90 percent do have some form of coverage; most have family coverage through employers that often costs considerably more than 9.61 percent of income. Others have purchased individual coverage without subsidies or coverage that does not meet ACA standards, like short-term plans. About 450,000 are uninsured.
The proposed rule would allow family members of an employee to receive ACA subsidies if employer-offered family coverage cost more than 9.61 percent of household income. The change results from a reinterpretation of the ACA regarding how premium tax credit eligibility is to be determined. The original IRS interpretation was always controversial and opposed by a broad range of stakeholders, including members of Congress. The proposed rule is consistent with the intent of the ACA to make affordable coverage more widely available and with the language of the statute.
Who Benefits from the Fix?
The proposed rule will give families a more affordable option, but not all those who are potentially affected will take advantage of it. If an employee in a family was offered affordable self-only coverage, the employee would still not be eligible for premium tax credits. The family would thus have to purchase two policies — one for the employee through the employer and one through the marketplace for the remaining family members. The family also may have to meet two deductibles, be subject to two out-of-pocket limits, and might find itself in two different provider networks. Families with more than one employee offered self-only coverage may need to purchase several policies, one for each employee and a marketplace plan for the remaining family members. For these reasons, many who would become eligible for coverage under the proposed rule would not opt for marketplace coverage, but rather purchase one employer plan in which all could participate.
One study estimates that under the proposed rule, about 710,000 more people would enroll in marketplace coverage with premium tax credits and 90,000 more children would be enrolled in Medicaid and the Children’s Health Insurance Program when their parents sought marketplace coverage because the system will automatically check for eligibility. The administration estimates that the number of uninsured would be reduced by about 200,000. The proposal would be more beneficial to lower-income enrollees than those with higher incomes because they receive fewer tax subsidies for employer coverage and higher tax credits for marketplace coverage. One study estimated that it would save families about $400 per person annually, but families with incomes below 200 percent of the federal poverty level (just under $28,000 for a family of four) would save $580 per person annually. The administration estimates that a million people would save money.
How Much Will It Cost?
The IRS does not project how much the rule will cost the federal government. This will depend partly on whether the expanded premium tax credits created by the American Rescue Plan Act (ARPA) are extended. The ARPA provides tax credits for higher-income people and more-generous tax credits for most recipients, but these only last through 2022. The rule will likely not go effect until 2023. Employer health insurance costs will fall as some families transition to marketplace plans and marketplace premiums may fall slightly because new enrollees would be predominantly healthy.
Other Provisions of the Proposed Rule and Executive Order
The proposed rule also would clarify that employer-sponsored coverage must cover 60 percent of health care costs and provide “substantial coverage of physician services and inpatient hospital services” for employees and related individuals to qualify as “minimum value” coverage. Individuals and families who are offered employer coverage that does not meet the standard of minimum value are eligible for premium tax credits even if their offer of coverage is affordable. Large employers also must offer minimum-value self-only coverage to employees to avoid employer mandate penalties but are not penalized if family coverage is not of minimum value.
Contemporaneous with the issuance of the proposed rule, President Biden also issued an executive order touting the accomplishments of his administration in extending and improving health care coverage and urging federal agencies to press on with this task. The executive order notes that one of seven uninsured Americans gained coverage between the end of 2020 and September 2021.
The proposed family glitch rule will be open for public comments for 60 days. Assuming it is finalized after comments are reviewed, it will expand coverage to even more uninsured and open the door for many others to access more affordable coverage. It truly is one of the most significant administrative actions to improve ACA coverage in the law’s 12-year history.
