Fixing the Family Glitch: Federal Rules Aim to Improve Coverage Affordability for Working Families

By Karen Davenport

At long last, the Biden administration is correcting a flawed interpretation of the Affordable Care Act (ACA). Until now this faulty reading of the law has created a regulatory barrier, often called the “family glitch,” that prevents approximately 4.8 to 5 million individuals from accessing more affordable health insurance. If finalized, the Internal Revenue Service (IRS) proposal to remove this barrier will make coverage more affordable and accessible for families of low and moderate-income workers, including those working for small businesses.

What is the family glitch?

The ACA ‘s health insurance marketplaces provide comprehensive coverage and financial assistance for people who do not have affordable employer coverage and do not qualify for public insurance. Workers whose employers offer comprehensive coverage that the ACA considers to be “affordable” are not eligible for federal marketplace subsidies; in 2022, worker contributions for employer-sponsored policies that do not exceed 9.61 percent of household income are considered affordable. Under a 2013 IRS interpretation, this affordability determination is based on the cost of employee-only coverage, even if the employee contribution for a family policy exceeds the affordability threshold. On average, premiums for employer-sponsored family policies are nearly three times higher than premiums for single policies, while employers usually require workers to contribute a higher proportion of the total premium for family coverage. Under the Obama-era interpretation, families offered unaffordable employer coverage have faced the choice of paying a significant portion of their annual income for employer-based coverage, purchasing unsubsidized marketplace coverage, or leaving family members uninsured.

What is changing?

The IRS’s proposed new rules, grounded in a revised interpretation of the law, consider the affordability of the worker’s total cost of employer-sponsored insurance for themselves and their family when determining eligibility for marketplace premium and cost-sharing assistance. If the cost of a family premium exceeds the ACA’s affordability threshold, family members will qualify for premium tax credits and possibly cost-sharing reductions. Even with this change, however, the employee will not be eligible for marketplace subsidies (unless employee-only coverage also exceeds the affordability threshold), so families in this situation may end up divided between employer-sponsored coverage and marketplace coverage.

Who will benefit?

The most obvious beneficiaries of this fix are individuals who are caught in the family glitch – including 2.2 million dependent children. The Biden Administration notes that 200,000 uninsured individuals will gain coverage and nearly 1 million people will pay less for health insurance under this proposal. Today, the vast majority (85 or 90 percent) of families in this situation still choose to enroll in employer-sponsored coverage, even though they must pay very high premiums. Under the new rules, these families may choose to split into two health insurance groups—the worker with affordable single coverage through their employer and the rest of the family through the marketplace—and save on their health care premiums. Roughly 9 percent of people affected by the glitch are uninsured, and the regulatory fix will allow these family members to sign up for subsidized marketplace plans. Families who are likely to benefit from this change will need to learn about their new options and weigh their coverage choices during marketplace open enrollment for 2023.

Families with workers in the service sector and the agriculture, mining, or construction industries are most likely to benefit from this policy change, as these workers are least likely to have an affordable offer of family coverage. The proposed fix will also improve access to affordable coverage for workers in small firms; last year, 19 percent of small firms paid little or nothing toward family premiums and 29 percent of covered workers in small firms would have had to pay at least $10,000 a year for a family policy through their employer. Under the proposed change, this family contribution would be considered unaffordable, and trigger eligibility for premium tax credits, for many families with incomes below roughly $104,000.

Many families caught in the glitch have more modest incomes. Nearly half of these families have incomes between 100 and 250 percent of the federal poverty level (FPL), or between $27,750 and $69,375 for a family of four. In addition to gaining access to premium tax credits that would limit their premium contributions to between zero and four percent of household income—or two to eight percent should the more generous premium subsidies offered under the American Rescue Plan (ARP) expire–dependents in these families would also qualify for cost-sharing assistance to reduce the out-of-pocket burden of health services. Another one-third of families impacted by the family glitch have incomes between 250-400 percent FPL and would qualify for premium subsidies (although not cost-sharing assistance) even if premium tax credits revert to the original ACA structure at the end of 2022.

To illustrate how the family glitch affects family finances, suppose Sarah and Mike have two children and together earn $80,000 a year. Sarah’s employer is a small business whose premiums and worker contributions in 2021 mirrored the national average for small firms, with premiums of roughly $7,800 annually for worker-only coverage and almost $22,000 for family coverage. Sarah’s employer covered most of the worker-only premium, so Sarah would have paid $1,244 for herself. But Mike does not have coverage through an employer, and like most small businesses, Sarah’s employer covered a much smaller portion of family premiums, leaving the family with 37 percent of the cost (more than $8,000 annually) for family coverage. Even though this family contribution exceeds 10 percent of their income, Sarah’s family could not access premium tax credits because the cost of her coverage alone is considered “affordable.” Under the new rules, however, Mike and their children will qualify for premium tax credits and pay less for coverage in the ACA marketplace than they would have paid in the employer plan. Exactly how much Sarah and Mike will save depends on whether Congress extends the ARP premium subsidies, or allows the sliding scale for premium tax credits to revert to the original ACA formula. One estimate suggests Sarah and Mike could save approximately $1,000 annually on their family’s health coverage, after accounting for differences in the federal tax treatment of employer-sponsored and directly-purchased coverage, and as long as Congress extends the ARP’s enhanced premium tax credits.

But families are not the only likely beneficiaries of this fix to the family glitch. Because family dependents are often young and healthy, they generally use fewer health care services and incur lower per capita spending, thus improving the risk profile of the insurance pool. In fact, the Urban Institute estimates that premiums in the nongroup market will fall by approximately 1 percent for all enrollees.

Employers are also likely to realize savings. Since the vast majority of family members caught by the family glitch still enroll in employer-sponsored coverage, employers who subsidize dependent coverage currently contribute to their health care premiums. As family members move to marketplace coverage, employers will no longer incur this expense. Nor will they incur a penalty under the ACA’s shared responsibility requirements since the law requires employers with at least 50 employees to offer coverage to workers but not dependents. According to one estimate, 585,000 people will move out of employer coverage, saving employers $2 billion a year in reduced premiums for family coverage.

Other impacts on families’ coverage

Through marketplace eligibility and enrollment processes, families who seek this coverage as they become newly eligible for premium tax credits will also be screened for eligibility in other coverage programs. Through this process, some will discover their children are eligible for publicly funded, low-cost coverage through Medicaid or the Children’s Health Insurance Program (CHIP). According to one estimate, 82,000 additional children will enroll in Medicaid and CHIP because their parents seek to enroll in marketplace coverage. Conversely, fixing the family glitch will also help children who lose eligibility for Medicaid or CHIP when the public health emergency ends.

Finally, families that take advantage of their new tax credit eligibility may end up split between employer-sponsored coverage and marketplace coverage. Workers with affordable self-only employer coverage will not qualify for premium tax credits and will likely remain with their employer’s plan—some families may even have two workers with affordable employee-only offers—while dependent family members will be newly eligible for marketplace subsidies. This will result in families facing multiple premium contributions as well as multiple deductibles, cost-sharing responsibilities, and out-of-pocket limits, and potentially different provider networks. In some cases, these costs and complications may mean that families will be better off continuing to pay for family coverage through an employer. Nevertheless, this policy change may fuel current trends that have splintered family insurance units, such as past expansions of children’s eligibility for Medicaid and CHIP, and reduced reliance on employer-sponsored health insurance.

Takeaway

Fixing the family glitch has been a top priority for consumer advocates and other health care stakeholders since the IRS issued the controversial and flawed 2013 interpretation of the ACA. The Biden administration’s proposal is consistent with the ACA’s focus on making affordable coverage broadly available and should lower the cost of comprehensive coverage for many families who must now pay more than what the law considers to be an affordable premium. Lower-income families and children will particularly benefit with new access to subsidized marketplace coverage and cost-sharing assistance.

The Treasury Department is accepting comments on this proposal until June 6.