The ACA has radically changed. Here’s how.
Wondering how to help your clients make sense of the latest changes to the ACA?
Look no further.
Employees are only eligible to receive a premium tax credit for coverage purchased in the Marketplace if they were not offered affordable employer-sponsored coverage. Before recent changes to the regulations, if your clients offered their employees coverage that was affordable (as determined by the law) based on the cost to cover just that employee, no one in that family could qualify for subsidies for Marketplace coverage.
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Who decides if coverage is affordable?
The ACA has a calculation built in to determine what coverage is considered affordable.
Let’s consider an employee working on average 130 hours a month (and thus treated as a full-time employee under the law), at the rate of $15 per hour. To test for affordability, multiply their hourly wage by the number of hours worked, and multiply that number by the annually-adjusted affordability percentage. In 2022, that percentage is 9.61%. In this case, to use the Rate of Pay affordability safe harbor, the lowest-cost, employee-only contribution rate must be less than $187.40 per month.
Previously, the cost of family coverage had no role in the affordability calculation. It just didn’t matter how much an employee might have to pay cover their entire family – no one in the family was eligible for a subsidy if the employee-only rate was affordable according to that calculation.
As you can see in these figures from a medium-sized business in California, the cost of family coverage in the lowest-cost plan can be a significant percentage of an employee’s income. This left some families in something of a bind. They had to either pay the unsubsidized price for family coverage, or find a way to cover the additional cost of the family level premium contribution under the employer-sponsored plan. Both options could have been considerable strains on family budgets and for many employees, might actually have been prohibitively expensive. This is often referred to as the ACA’s “family glitch.”
We recognize that not everyone has a plan with a zero-dollar employee contribution for the employee-only coverage tier. For the sake of comparison, here is the same chart, but instead of the zero-dollar employee contribution, the contribution rate is set at the maximum dollar amount a plan could cost an employee for employee-only coverage and remain affordable under the law.
Just days after his inauguration, President Joe Biden issued Executive Order 14009 “Strengthening Medicaid and the Affordable Care Act”. In it, he instructed the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and other agency heads to review and assess all policies and procedures related to Medicaid and the ACA to ensure they align with his administration’s policy of defending and strengthening those programs. This executive order specifically targeted, “policies or practices that may reduce the affordability of coverage or financial assistance for coverage, including for dependents,” which industry watchers took as a signal that he would look for a regulatory fix to address the family glitch.
| Employee Income | Employee-Only Coverage $8,400 Annually |
Family Coverage $21,876 Annually |
||
| Employee Premium Contribution | Percentage of Income | Employee Premium Contribution | Percentage of Income | |
| $30,000 | $0 / $0 | 0% | $952 / $11,424 | 38% |
| $45,000 | $0 / $0 | 0% | $952 / $11,424 | 25% |
| $60,000 | $0 / $0 | 0% | $952 / $11,424 | 19% |
| Employee Income | Employee-Only Coverage $8,400 Annually |
Family Coverage $21,876 Annually |
||
| Employee Premium Contribution | Percentage of Income | Employee Premium Contribution | Percentage of Income | |
| $30,000 | $240.25 / $2,883 | 9.61% | $952 / $11,424 | 38% |
| $45,000 | $360.73 / $4,324.50 | 9.61% | $952 / $11,424 | 25% |
| $60,000 | $480.50 / $5,766 | 9.61% | $952 / $11,424 | 19% |
IRS Notice 2022-22184 finalized new rules:
- Old rule: entire family’s eligibility for subsidies based on cost of employee-only coverage
- New rule: determine subsidy eligibility based on cost to cover employee plus members of their family, as applicable
This translates to more affordability calculations and more opportunity for mistakes. The notice points out that it is possible employers will see an increase in eligibility notices, if employees who previously could not receive a subsidy because their spouse was offered affordable single-only coverage by their employer now become eligible. Because eligibility for a tax credit is the trigger for a potential penalty, your clients will want to be careful when they receive one of these notices. For now, know that your clients could be facing an even greater administrative burden than before as a result of this regulatory change.
One of the outstanding questions is how plan sponsors will respond to this shift. One idea that has been suggested is that employers may seek to simplify their plan structures, perhaps to only two tiers. With that comes a question of pricing – how will they price a simplified tier structure, and what kinds of contributions make sense for their organization?
For some employers, this shift will mean a smaller risk pool. If spouses and dependents can now qualify for premium tax credits in the Marketplace, who will remain in the risk pool? What could a smaller risk pool mean for premiums?
It’s worth noting that this shift could have a unique impact to younger employees and the adult children of older employees. Under the new rule, the cost to cover non-dependent children will not be factored into the affordability calculation. Depending on the cost to cover those individuals, it may no longer be financially viable for adult children to remain on their parents’ medical plans. This could add participants to a risk pool – younger employees – or see participants leave – the adult children of older employees.
All of this points to a potential larger hurdle for employers:
How will their tier structure, contribution structure, and plan design affect their ability to attract and retain employees?
Finally, you might want to urge your clients to take this time to speak with their broker. Are they advising them about your options, or proceeding with normal rate increases and renewals? Are they effectively communicating and educating employers about the consequences of each decision they have to make regarding plan design, tier structure, and contributions?
It’s important that your clients give consideration now to how they can most effectively communicate these changes to their employees. If they are in a position to significantly change their tier structure or contributions, they’ll need to communicate those changes quickly and in a way that reduces friction during the transition.
Employers also likely face an increased need to educate employees about what pricing to report when they are purchasing family coverage on the Marketplace. When employees purchase coverage in the Marketplace, their employer is notified, and given the opportunity to respond if that employee was offered affordable single-only coverage and thus not eligible for a premium tax credit.