5.1 Million Impacted By Family Glitch: What Is It, And How Is The IRS Taking Steps To Fix It?
Updated: Apr 23, 2022
A headline from the scholarly journal, Health Affairs, starts… “The Family Glitch: Some low-to-moderate-income families may be locked out of receiving financial assistance to purchase health coverage through the Marketplaces.” (Health Affairs, 2014)
It was on 11/10/2014, only one year into the Affordable Care Act being live, that scholars published a major flaw in the Affordable Care Act…The Family Glitch.
Ever since, industry professionals, government officials, and agencies have looked at closing the Glitch. “Whether an oversight or a drafting error, experts at every point along the political spectrum agree that the current interpretation unfairly penalizes families.” (Health Affairs, 2014)
WHAT IS THE FAMILY GLITCH?
Most individuals across the US have health insurance coverage by way of laws that predate the ACA. These include employer-based plans, Medicaid (for the needy), and Medicare (for the aged/disabled). The ACA was targeted to help people who do not have access to other coverage to sign up for a medical plan that provided at least “Minimum Essential Coverage and an Affordable price.” For the statutes to be effective, however, regulators had to weave a path through existing systems to help the most amount of people acquire this coverage. In doing so, they designed a LEGAL construct around the term Affordable.
“Under the ACA, an individual worker and family members who can enroll in "affordable" job-based health insurance cannot get financial help to lower the costs of Marketplace coverage. Based on the way eligibility for premium tax credits is determined under current Internal Revenue Service (IRS) regulations, employer-sponsored insurance, for both the employee and his or her family members, is deemed affordable if the cost of self-only coverage--that is, a plan that covers only the individual worker--is less than 9.50 percent of household income.” (Health Affairs, 2014)
At a high level, if the plan offered by your employer is affordable, then you are not eligible to get a lower-cost plan via the ACA. This ensured that over 50% of consumers already on their employer plan would not be affected by the ACA. But there is a problem.
At a low level, the way the IRS looks at affordable is if the plan is affordable for the employee, then it must be affordable for the family. “Wait… that does not make sense? My employer could charge me $100 per month to cover myself or charge $1,000 per month to cover my family. But, out of a technicality, since the $100 is affordable, they consider the $1,000 also affordable?” Yes.
Read more about the family glitch here.
HOW SHOULD THINGS WORK?
The idea behind patching the family glitch is to say, $1,000 is not affordable. And, if it is not affordable, you would enroll in the $100 per month plan through your employer, and your family would be able to get a low-cost plan (potentially in the $100 - $200 range depending on demographics) that would bring your total premium down to $200 - $300 per month. This is much more manageable and mirrors what health insurance premiums were for workers before the ACA came along.
THE IRS FIX
The Kaiser Family Foundation, a non-profit organization, estimates “that 5.1 million people fall into the family glitch. A majority of them are children, and among adults, women are more likely to fall into the glitch than men.” (Cox, Amin, Glaxton, & McDermott, 2021) Since the implementation of the ACA, the IRS, Department of Health (HHS), and congress have discussed how to fix this. Generally speaking, Congress can pass legislation, or government agencies can interpret the law. Sen. Al Franken (D-MN) introduced legislation that would have fixed this under congress as cited in 2014 but it never passed. With increased polarization, the next solution was for the government agencies to step in. That is how we arrived here today.
On April 7th, 2022, the IRS posted a proposed rule in the Federal Register. This relatively short, 35 page document is titled “Affordability of Employer Coverage for Family Members of Employees” What it does is address the definition of affordability by requiring TWO tests.
Employee Affordability - Test one is if the plan is affordable to the employee offered coverage, then they are not eligible for tax credits. So, they would, under the above example, pay the $100 premium for themselves.
Family Affordability – Test two looks at the family premium through the employer plan against the household income. IF the second test results in coverage not being affordable, then the spouse and dependents could be eligible for lower premium coverage barring no other insurance is available (spouse employer, CHIP, Medicaid).
The current target for this proposal, if approved, would be to affect plans with a 1/1/2023 start date or beyond.
Now that we have a clear understanding of the facts surrounding the family glitch, and the proposed regulations, the rest of this will discuss the potential impact on various parts of the healthcare system.
In relative terms, 5.1 million is small when compared to the employer market of over 150 million enrollees, but in the individual market, where 14.5 million enrolled last year, this could be a 33% increase in enrolments.
INDIVIDUALS AND FAMILIES
With No Employer Coverage
For people who do not have access to employer coverage now, in the short run there will be a negligible impact on their health insurance. In the long run, as 5.1 million people move from the employer market to the individual market (as we call it in the industry) there will be pressure on insurance companies to compete for the new group of people moving off employer-based plans. Since women and children represent a larger percentage of the population impacted, these individuals tend to have lower claims and could help stabilize the individual market.
The employee has an affordable option, and the family does not
This group is going to benefit the most from the family glitch being removed. The employee would stay on the group plan, and the family would look at a move to the marketplace. In the short run, this will lower the family’s health insurance costs and give them access to a broader selection of plans. That said, the individual market varies by the county you live in and the options available. Populations in rural areas will find there are fewer options but, those options tend to include a blue-cross carrier, and still eclipse having one or two employer plans.
This is with one major caveat. Unless someone in your household has self-employed income, Individual plan premiums are not tax-deductible. So, it is important to weigh the net premium of having one spouse on the employer plan, and the other in the market against the premium of having everyone on the employer plan and the tax savings. In my example, paying $100 pretax(through work) and $200 after tax is a monthly savings of $700 per month.
Unless, in this case, the person is saving more than $8400 per year on their taxes, the lower premium route is still in their best interest. As the net premium of splitting plans gets closer to having everyone on the employer plan, the choice gets harder. We HIGHLY recommend using a health insurance broker that specialized in the Individual Markets to help with this decision. Since group brokers seldom deal with income calculations, or the exchange, an individual market broker will have the best set of tools to help complement your employer coverage.
The family has affordable access
For employees who have access to affordable coverage through their employer, no change is necessary. The hope is that patching this glitch will drive more employers to offer all-in affordable options over the long haul.
For employers in the “micro” and “small” markets, not being an Applicable Large Employer (ALE) has some benefits and some drawbacks. As for benefits, the amount of compliance reporting is reduced, and you get to decide if and how you will offer benefits to your team. For those that do not offer benefits, your staff will fall under the “no employer coverage” bucket above. For those that offer ICHRA, QSEHRA, or other cash-based benefits, you may want to collaborate with your broker to determine the most effective way to maximize the amended IRS interpretation. And, for those that offer traditional benefits, depending on how you look at it, this may be a benefit.
For group plans under fifty employees, you do not have the ability to bargain with carriers around lowering your rates since by law they are standardized. Additionally, depending on the size of your group, you may not be able to leverage self-funded options either. Instead, under the proposal, you would be able to focus your resources on the needs of your employees and use spouse or family class of premiums to encourage families to the exchange. This serves the dual purpose of helping your staff get the best option for them while simultaneously keeping your overhead in check.
As an ALE, we tend to see groups offering either ICHRA, Fully Underwritten or Self-Funded plans. For cash benefit plans like ICHRA, you would be in compliance to offer an ICHRA stipend to the employee and give their family an opportunity to access ACA coverage. Since the ICHRA would satisfy the Affordability calculation for the employee, you would not be subject to additional plan administration beyond an outside party verifying the reimbursements.
For fully insured and self-funded plans, the discussion we have had with other professionals is related to your risk pool. If you offer an affordable plan for the family, then you will retain enrollees with historically lower claims history. These related family members will help your claims numbers, and especially for self-funded, allow you to recoup the money back while keeping your stop-loss premiums down.
However, if you do not offer an affordable plan at the Family level you may not be able to keep certain costs down, but on the other hand, the employer portion of premiums expended on related persons would also drop. We have mixed feelings about the impact, but also recognize that the relative size of Families affected against the total members enrolled is less than 5% of the total US market.
TPAs – Brokers
One thing that individuals and employers will have to get their bearings on is the inherent difference between the group and individual markets. As such, your employer’s points of contact, including your Group Health Broker, HR teams, payroll, and TPA’s are often not versed in the individual markets.
This necessitates the need for employers to add the Individual Health Broker to their team of advisors. This is because, the individual market is segmented into four classes of need: Ultra-Low Income(Medicaid), Middle Income (up to 400% of the federal poverty limit), High Income (401%+), and Seniors(Medicare). The first three all have INCOME as a precursor to any plan decisions.
Once a household member is deemed to have access to “Unaffordable” coverage, the Individual broker will assist in calculating their Modified Adjusted Gross Income (MAGI), and screening plans based upon their medications(verifying drug formularies), doctors(checking individual networks), and how they use the insurance to recommend and ultimately effectuate the coverage on behalf of your employees household member.
The family glitch has been a problem since the Affordable Care Act was signed into law. Over the past decade, regulators and legislators have been trying to close this loop. Finally, the IRS has a patch, and it will have clear implications for both the individual and group markets moving forward. The challenge with any type of forecasting is that Macroeconomic markets do not operate in a vacuum. Inevitably some institutions will see this as an opportunity for people, while others see this as impeding on the employer markets.
At the end of the day the goal is to give consumers access and a choice, not to steer them. And, to give them access, employers should be prepared to review their contribution policies and onboard new advisors to help any employees looking to transition. If you are looking for such an individual Health Broker, here are a few recommendations.
Full transparency, we are active and happy members of both of these trade groups. We stand to a higher level of ethics due to their codes of conduct and find they prove to be a great litmus test when it comes to searching for a new broker in your market.
Health Agents for America’s “Find an Expert” site - http://www.hafamerica.org/find-an-expert/
National Association of Health Underwriters site - https://nahu.org/looking-for-an-agent/find-an-agent
Or, feel free to reach out to us. We serve clients around the country and are happy to help answer any questions.
Cox, C., Amin, K., Glaxton, G., & McDermott, D. (2021, April 7). The ACA Family Glitch and Affordability of Employer Coverage. Retrieved from KFF: https://www.kff.org/health-reform/issue-brief/the-aca-family-glitch-and-affordability-of-employer-coverage/
Health Affairs. (2014, November 10). The Family Glitch. Retrieved from Health Policy Brief: https://doi.org/10.1377/hpb20141110.62257