IRS Proposes Changes to ACA Affordability Thresholds

On October 13, 2022, the IRS issued final regulations that revise how to measure affordability under the Affordable Care Act (ACA) for purposes of an individual’s eligibility for the premium tax credit.  The final regulations are largely unchanged from the proposed regulations the IRS issued in April. 

The final regulations have been dubbed a fix for the “family glitch,” which prevented certain families from receiving the premium tax credit when purchasing health coverage in the marketplace.

As background, under the ACA, the IRS imposes excise taxes (i.e., the employer mandate penalty) on applicable large employers if an employee enrolls in coverage through the marketplace and receives a premium tax credit.  An employee is eligible for the premium tax credit if their employer has not offered “affordable” coverage that provides “minimum value” (i.e., the premiums exceed an indexed percentage of household income – 9.61% in 2022 and 9.12% beginning in 2023).

Under current rules, employer coverage is “unaffordable” for an employee if the employee’s share of the annual premium for self-only coverage is more than the required contribution percentage of household income.  Coverage is also considered “unaffordable” for the employee’s spouse and dependents if the share of the annual premium the employee must pay for self-only coverage is more than the required percentage of household income.  In other words, if self-only coverage is affordable for an employee, it is also considered affordable for the employee’s spouse and dependents, regardless of how much the employee must actually pay to cover them, too. 

The IRS’s regulations seek to close this “family glitch” for purposes of an employee’s family members’ eligibility for the premium tax credits.  The regulations require separate affordability determinations for employees and for their family members.  Employer coverage would be considered “affordable” for an employee’s family members if the portion of the annual premium the employee must pay for family coverage is not more than the required contribution percentage of household income. 

Importantly, the IRS’s regulations only change the affordability rule for an employee’s spouse and dependents; it does not change the rule for employees.  In other words, the regulations do not expand the employer mandate obligations; such penalties hinge on whether an employee received a premium tax credit, not whether the employee’s spouse or dependents received a credit.  Under the regulations, if an employer offered affordable employee-only coverage, but unaffordable family coverage, the employee’s spouse and dependents would now be eligible for the premium tax credits.  Their eligibility would not trigger an employer penalty (because employee-only coverage was affordable).

The final regulations apply for tax years beginning after December 31, 2022.