Final regulations aimed at eliminating the “family glitch” in the Affordable Care Act

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The IRS has issued a new rule aimed at fixing the so-called “family glitch” in the Affordable Care Act. The family glitch prevented family members of employees from receiving health insurance premium subsidies because the employee’s self-only health insurance was considered affordable, even if the cost of obtaining family coverage made it unaffordable to the household.

Starting in 2023, the assessment of whether health insurance is considered affordable will also be made at the family level.

Affordability determines access to health insurance premium assistance tax credits

Taxpayers generally are not eligible for health insurance premium tax credits for coverage purchased on a Marketplace Exchange if they are eligible for affordable coverage through their employer. An employer’s plan is considered unaffordable if the employee has to contribute more than about 9.5% of their income toward premiums (the percentage is adjusted for inflation each year).  

The IRS previously interpreted this to mean that an employee and their dependents were not eligible for subsidies if the cost of an employee’s “self-only” coverage was affordable. For example, if an individual worked for an employer where their self-only plan only cost 6% of their income, but adding their spouse and children under the family plan would cost 12% of their income, the entire family would be considered to have been given an “affordable” offer of coverage, and would be barred from receiving subsidy assistance for health insurance elsewhere. 

This interpretation resulted in millions of dependents—mostly children of lower income workers—falling into the family glitch, where they could not afford the employer’s health insurance or get tax credits to afford Marketplace coverage. 

Fixing the family glitch

The IRS’s final rule clarifies that affordability tests will be separate for employees and family members. 

1. Employees may be eligible for premium tax credits if their cost for employee-only coverage is more than 9.5% of their income (i.e. is unaffordable); 
2. Employee’s dependents may be eligible for premium tax credits if the cost for family coverage is more than 9.5% of their household income. 

If, say, two spouses are both employed at different employers, and they receive an affordable offer of coverage from one of them (either as an employee or dependent), then they are barred from eligibility for the tax credit. 

This rule will be implemented for the 2023 enrollment period. It is important for individuals to be aware that they or their dependents may be newly eligible for more affordable health insurance in the coming year.