New Cafeteria Plan Changes Fix “Family Glitch” in ACA Subsidies

October 18, 2022

Last week, the Department of the Treasury (DOT) released regulations designed to close a loophole, known as the “family glitch,” that blocked family members from receiving Affordable Care Act (ACA) tax credits if someone in their household had access to an economical employer-sponsored health plan. 

Currently, individuals are eligible for subsidies if they do not have employer-provided health insurance coverage, or if the health insurance coverage provided by the employer is not affordable. The calculations to determine whether coverage is not affordable and whether a premium subsidy is available are based on the employee’s cost for employee-only coverage. In some cases, the coverage provided by the employer is affordable for employee-only coverage but not affordable for coverage for the rest of the family. As a result, members of the employee’s family are not eligible for subsidized coverage under the ACA.

The new DOT final rule, issued on October 13, 2022, revised a 2013 interpretation on premium tax credit eligibility for families. The final rule provides that employer-sponsored health coverage is affordable based on the cost of coverage not just for the employee, but for the employee and related individuals. In addition, the final rule requires the plan to provide a minimum value coverage for related individuals of 60 percent, similar to the existing rule for employees.

Before the final rule, eligibility for a premium tax credit depended on whether the premium for single group medical coverage offered to an employee was unaffordable. Now, it will be based on whether the premium for family group medical coverage is unaffordable. The final rule becomes effective on December 12, 2022.

The final rule does not require employers to compute minimum value separately for the employee and related individuals. The final rule also does not affect:

• Reporting required under Code section 6055 and 6056 (Forms1094 and 1095).
• Affordability calculations for individual coverage health reimbursement arrangements (HRAs) or qualified small employer health reimbursement arrangements (QSEHRAs).
• Affordability calculations for employees offered multiple offers of coverage.

To complement these changes, on October 11, the Internal Revenue Service (IRS) issued Notice 2022-41, which allows a non-calendar year cafeteria plan to permit an employee to revoke an election of family coverage to enroll in Exchange coverage under two conditions:

• The individual qualifies for a special enrollment period.
• The revocation corresponds with the intent to enroll in Exchange coverage no later than the day immediately following the last day employer coverage is revoked.

Employers that offer coverage through a cafeteria plan may permit an employee to disenroll from coverage to enroll in Exchange coverage beginning January 1, 2023. An employer choosing to amend the cafeteria plan may do so retroactively to the first day of the plan year and must adopt the amendment before the last day of the plan year that begins in 2024.

Notice 2022-41 reminds employers that they do not have to provide this expanded ability for an employee to change elected coverage level and salary reduction.