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Life Health > Health Insurance > HSAs

10 Quick Facts About the New IRS Final Health Premium 'Family Glitch' Regs

By Allison Bell

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What You Need to Know

  • The rule change could impact 3 million to 5.1 million people in families now affected by the current 'family glitch.'
  • Employer clients may need extra help with explaining the changes to employees.
  • Clients offered access to 'skinny plans' may need extra help with analyzing their health coverage and using arrangements such as HSAs, flexible spending arrangements or supplemental health insurance.

The Internal Revenue Service today created a major health insurance advice event — the release of an employer health coverage affordability final rule.

The regulations, which some supporters call the “family glitch fix” regulations, are set to apply Jan. 1, 2023, which is less than three months away, according to a preview version of the new final family coverage affordability regulation.

The regulations will affect workers who find that the cost of their employers’ family coverage is very high, relative to their wages. Those workers’ spouses and dependents will be able to use federal premium subsidy money to pay for 2023 ACA exchange plan health coverage.

In states that use the federal government’s HealthCare.gov system to provide ACA exchange services, the open enrollment period for 2023 coverage starts Nov. 1 and is set to run until Jan. 15, 2023.

If the regulations take effect on schedule and work as the IRS expects, insurers, employers, ACA exchange programs, web brokers and traditional health insurance agents will be in a race to explain the new approach in time for workers to use ACA subsidies to pay for health coverage for their loved ones in 2023.

What It Means

Some moderate-income — or even relatively high-income — clients may need help with deciding whether they should enroll their spouses and children in the health coverage provided by their employers or in coverage provided by an Affordable Care Act public exchange.

Any employer clients may need extra help with explaining the changes to employees, and with deciding how the changes might apply to any health reimbursement arrangement programs they offer.

Agents and advisors who are active in public policy can help shape how the new approach applies, or does not apply, to workers who use HRAs to buy their own individual health coverage.

Background

The current Affordable Care Act system, which came to life in 2014, provides health insurance “premium tax credit,” or PTC, subsidies.

Moderate-income people can use the premium tax credit subsidies to pay for health coverage purchased through HealthCare.gov, or through state-run public exchange programs, such as Covered California and Your Health Idaho.

Workers who have access to what the government classifies as solid health coverage, or minimum essential coverage, cannot use the subsidies.

Workers can use the subsidies if they do not have access to solid employer coverage.

For 2022, employer coverage is classified as affordable if it costs less than 9.61% of a worker’s household income.

Today, ACA exchange programs and the IRS base the affordability calculations on the cost of worker-only coverage, not on the cost of covering the worker’s whole family. Because of that interpretation, which was developed in 2013, the children and spouses of covered workers might not be eligible for ACA exchange plan premium subsidies, even if a worker’s family cannot afford to pay for employer coverage for those family members.

The IRS posted draft family coverage affordability update regulations in April. The draft included a worker’s family members in the affordability calculations.

The IRS received 3,888 comments in response to the draft, including some that offered suggestions unrelated to the draft, such as proposals that the United States adopt a universal health care system.

Clara Raymond is listed as the regulation contact person.

Quick Facts

Here are 10 things to know about the new final rule.

1. IRS officials believe this regulation is important.

Some critics of the family coverage affordability draft, including Brian Blase of the Paragon Health Institute, have argued that the calculation change will be too expensive and that the new regulation exceeds the scope of IRS authority.

IRS officials contend that the ACA provisions related to worker coverage affordability calculations are not clear about how affordability calculations should work, and that making the calculation change will help workers’ families.

“One married couple even testified to a state legislature that they divorced solely to retain the husband’s eligibility for the PTC after his wife got a new job with an offer of family coverage at a cost of $16,000, over half of the husband’s annual earnings,” officials write in the preamble, or official introduction, to the final regulations.

2. Implementing regulations can be tricky.

Some Republicans oppose the new family coverage affordability regulations. In the past, opponents of regulations have succeeded at blocking implementation of regulations, or changing how the regulations work, by going to court, or by blocking implementation funding.

3. If these regulations will take effect as written, on schedule, anyone involved in implementing them will be very busy.

IRS officials rejected requests to postpone implementing the new regulations until taxable years beginning after Dec. 31, 2023.

4. The IRS believes the regulations could require workers to think about coverage options for as many as 5.1 million family members.

Studies cited in the regulation preamble indicate that about 3 million to 5.1 million people could be in families now affected by the current family coverage affordability calculation approach.

About 600,000 to 2.3 million of those people could end up with ACA exchange plan coverage, and the total number of people who have some kind of major medical coverage could increase by 80,000 to 700,000, according to the studies.

Providing the extra subsidies could cost the federal government an extra $2.6 billion to $4.5 billion per year.

5. The new coverage affordability calculation definition of “family” includes only spouses and dependents.

U.S. employers now let workers’ children stay on the workers’ group health coverage until age 26, even if the children are ages 21 or older and are not dependents.

For coverage affordability calculation purposes, a worker can include the finances of a spouse who files a joint return with the worker, and any dependents, such as children.

The worker cannot include a child who is no longer a dependent.

IRS officials note that adult children who are not dependents may prefer to stay on their parents’ group coverage but can also apply separately to use premium tax credit subsidies to buy their own individual coverage.

Because those adult children already have access to premium tax credit subsidies, they are not affected by the spouses’ and dependents’ current lack of access to help with paying exchange plan premiums, officials say.

6. Spouses’ coverage offers affect the affordability calculations.

Sometimes, a worker’s employer might offer family coverage that’s unaffordable for the worker’s spouse.

The spouse might have an offer of affordable coverage from their own employer.

In that situation, the IRS will treat the worker’s spouse as having access to affordable coverage, officials say.

A spouse who has an offer of affordable coverage from their own employer cannot use ACA subsidies to pay exchange plan premiums, officials say.

7. The IRS will probably work with other federal agencies on setting coverage affordability calculation rules for employers that use health reimbursement arrangements to provide cash that workers can use to buy their own individual health coverage.

A health reimbursement arrangement, or HRA, is a health account that an employer can use to supply pretax cash a worker can use to pay health care expenses.

The law that created a somewhat similar type of health account, the health savings account, defines HSA cash as the individual account holder’s cash.

A worker who is willing to pay taxes and penalties can withdraw HSA cash and spend it on anything.

One tradeoff is that the worker must use an HSA together with a high-deductible health plan. A worker cannot use a stand-alone HSA to provide, or pay for, ordinary major medical coverage premiums.

Under the rules governing an HRA, any cash in an HRA belongs to the employer. But, because of the nature of HRA laws and regulations, a worker can use an HRA together with low-deductible or no-deductible health coverage.

Congress created a special type of HRA, the qualified small employer HRA, or QSEHRA, in the 21st Century Cures Act of 2016. Workers can use the employer cash in QSEHRAs to buy their own coverage.

Officials in the administration of former President Donald Trump created another “cash for coverage” HRA, the individual coverage HRA, or ICHRA, in regulations that were completed in 2019.

IRS officials acknowledge that the proposed and final regulations do not address coverage affordability calculations for ICHRAs. They suggest that IRS regulations cannot change the QSEHRA rules, because QSEHRA rules are spelled out in a statute.

The IRS will work with the U.S. Department of Health and Human Services and the U.S. Department of Labor to decide whether to issue HRA guidance, IRS officials say.

8. Affordable employer coverage that provides minimum value may not have to cover 60% of the value of the standard essential health benefits package.

To qualify as solid major medical coverage, an individual policy, or a small group policy sold through an ACA public exchange, must cover at least about 60% of the value of the standard essential health benefits package.

The EHB package includes benefits such as prescription drugs and rehabilitative services as well as hospitalization and physician services.

Under the new final regulations, employer coverage can meet minimum value standards by providing “substantial coverage of inpatient hospital services and physician services.”

That interpretation could renew employer and insurer interest in offering “skinny plans,” or low-cost plans designed to supply only minimum value coverage, and not coverage based on the EHB package.

Clients offered access to skinny plans may need extra help with analyzing their health coverage and using arrangements such as HSAs, flexible spending arrangements or supplemental health insurance policies to fill in coverage gaps.

9. Employers will not have to pay penalties if workers’ dependents qualify for exchange plan subsidies.

Part of the ACA descends from older “pay to play” health insurance regulation efforts, or efforts to make large employers either provide a minimum level of health coverage or reimburse the government if workers end up using Medicaid or other public health programs.

The ACA version of the pay-to-play requirements, the “employer shared responsibility” provisions, require employers to pay penalties, in some cases, if they fail to provide a minimum level of affordable health coverage and workers end up qualifying for ACA public exchange plan subsidies.

Under the new coverage affordability calculation rules, spouses and dependents may be able to qualify for exchange plan subsidies, but, in those situations, the employers will not have to pay penalties, IRS officials say.

10. Employer cafeteria plans are getting guidance.

Some employers use Internal Revenue Code Section 125 cafeteria plans that workers and dependents can use to pay for coverage.

The IRS has responded to a commenter’s concerns about a potential conflict between the affordability rules and the cafeteria plan rules by issuing guidance in IRS Notice 2022-41, officials say.

The guidance will affect any cafeteria plan with a plan year that starts on a date other than Jan. 1.

Normally, people in cafeteria plans cannot switch out of the plans in the middle of a plan year.

The new guidance will let a worker’s spouses and dependents give up cafeteria plan coverage and switch to ACA exchange plan coverage in the middle of the cafeteria plan year.

(Image/Sura Nualpradid/Shutterstock)

Allison Bell

Think_Allison

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