Under the Code and ACA regulations, 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 (9.5%, adjusted annually for inflation) (26 C.F.R. § 1.36B-2(c)(3)(v)(A)(1)). Under existing regulations from 2013, the affordability of an offer of group health plan coverage for an individual who can enroll in the coverage because of the individual's relationship to an employee (that is, a related individual) was based on the employee's self-only cost to enroll in the coverage (26 C.F.R. § 1.36B-2(c)(3)(v)(A)(2) (the "(A)(2) regulation")). In other words, if self-only employer coverage is affordable for an employee, the coverage is also generally deemed affordable for a spouse and dependents who are eligible to enroll in the employer coverage—regardless of how much the employee must pay to cover the spouse and dependents. As a result of this rule, which is commonly known as the "family glitch," the employee's share of premiums for family coverage is not considered in evaluating the affordability of employer coverage for related individuals.

In April 2022, the IRS issued proposed regulations that would change the existing regulations so that affordability of employer-sponsored coverage for an employee's family members would be determined based on the employee's share of the cost of covering the employee and the employee's family members (see Legal Update, IRS Proposed Rules Would Change PTC Affordability Determinations for Family Members). (The proposed regulations also included a change concerning minimum value determination for related individuals.)

The final regulations also adopted a proposal regarding individuals with offers of coverage from multiple employers. Under the final regulations, an individual with offers of coverage from multiple employers (either as an employee or a related individual) has an offer of affordable coverage if at least one of the offers is affordable. The IRS noted that this provision did not functionally change the existing regulations. Instead, the final regulations expressly state how the current rule applies when an individual has multiple offers of employer coverage.

In response to comments on the proposed regulations, the final regulations include a minimum value safe harbor regarding related individuals. Under the safe harbor, an employer's plan that provides minimum value to an employee also provides minimum value to related individuals if the scope of benefits and cost sharing (including deductibles, co-payments, coinsurance, and out-of-pocket maximums) under the plan are the same for employees and family members. The safe harbor includes a special rule where a plan's cost-sharing varies based on:

Under IRS guidance from 2014, employees may enroll in a QHP through an ACA exchange (if they prefer that coverage) by allowing cafeteria plans to let employees revoke elections for group health plan coverage in two situations (Notice 2014-55; see Legal Update, IRS Guidance Addresses Cafeteria Plan Elections, Employer Mandate Measurement Periods and PCOR Fees: Additional Revocations of Cafeteria Plan Elections Permitted). However, Notice 2014-55 did not allow an election for group health plan coverage to be revoked if only related individuals—and not the employee—become eligible to enroll in an exchange-based QHP.

Under Notice 2022-41, which expands on the IRS's 2014 guidance, a cafeteria plan that does not operate on a calendar year basis may allow an employee to prospectively revoke an election of family coverage under a group health plan that:

This relief is available if two conditions are met. First, one or more related individuals must be eligible for a special enrollment period to enroll in an exchange-based QHP (under guidance issued by the Department of Health and Human Services (HHS)). Alternatively, one or more already-covered related individuals must seek to enroll in a QHP during an exchange's annual open enrollment period.

Second, the election revocation under the group health plan must correspond to the related individual's intended enrollment in a QHP for new coverage that begins no later than the day immediately following the last day of the original coverage that is being revoked. If the employee does not enroll in an exchange-based QHP (as set forth in Notice 2014-55), the employee must elect self-only coverage (or family coverage including one or more already-covered related individuals) under the group health plan.

A cafeteria plan may rely on an employee's reasonable representation that the employee, related individuals, or both, have enrolled (or intend to enroll) in an exchange-based QHP for new coverage that is effective beginning by the day immediately after the last day of the original coverage that is being revoked.

The relief under Notice 2022-41:

Employers must timely amend their cafeteria plans to allow the additional election changes permitted under the companion guidance. Specifically, an employer must adopt its amendment on or before the last day of the plan year in which the elections are allowed. The amendment may be retroactively effective to the first day of that plan year. However, this assumes:

An employer also may amend its cafeteria plan to adopt the new permitted election changes—for plan years beginning in 2023—at any time on or before the last day of the plan year that begins in 2024. However, an employer cannot amend a cafeteria plan to allow an election to retroactively revoke coverage.

Notice 2022-41 is effective for elections that are effective on or after January 1, 2023.