IRS Proposed Rules Would Change PTC Affordability Determinations for Family Members | Practical Law

IRS Proposed Rules Would Change PTC Affordability Determinations for Family Members | Practical Law

The Internal Revenue Service (IRS) has issued proposed regulations that would amend existing regulations to provide that affordability of employer-sponsored minimum essential coverage (MEC) for an employee's family members would be determined based on the employee's share of the cost of covering the employee and those family members. Under existing regulations, that determination is based on the cost of covering only the employee. The proposed regulations would provide a similar minimum value rule for related family members—to be based on the level of coverage provided to related individuals under an employer's health plan.

IRS Proposed Rules Would Change PTC Affordability Determinations for Family Members

Practical Law Legal Update w-035-1167 (Approx. 5 pages)

IRS Proposed Rules Would Change PTC Affordability Determinations for Family Members

by Practical Law Employee Benefits & Executive Compensation
Published on 05 Apr 2022 • USA (National/Federal)
The Internal Revenue Service (IRS) has issued proposed regulations that would amend existing regulations to provide that affordability of employer-sponsored minimum essential coverage (MEC) for an employee's family members would be determined based on the employee's share of the cost of covering the employee and those family members. Under existing regulations, that determination is based on the cost of covering only the employee. The proposed regulations would provide a similar minimum value rule for related family members—to be based on the level of coverage provided to related individuals under an employer's health plan.
On April 5, 2022, the IRS issued proposed regulations regarding its premium tax credit (PTC) rules that would change how affordability determinations are made for an employee's family members. PTCs may be available for individuals who enroll in qualified health plans (QHPs) under the Affordable Care Act's (ACA's) health insurance exchanges (see Practice Note, Affordable Care Act (ACA) Overview: Premium Tax Credit Under Health Insurance Exchange and Article, Health Insurance Exchange and Related Requirements Under the ACA).

Premium Tax Credits for ACA Exchange Coverage

Added by the ACA, Section 36B of the Internal Revenue Code (Code) makes available a refundable tax credit to certain individuals and family members to make health insurance purchased through the ACA's exchanges more affordable (26 U.S.C. § 36B; see Legal Update, IRS Final Rules and Draft Form Address Premium Tax Credit). The credit is available to individuals who meet certain qualifying requirements, one of which is that the individual cannot be eligible for "minimum essential coverage" (MEC)—which includes employer-sponsored health coverage—for a month. An individual who is eligible for employer coverage for a month, is not permitted a PTC for that month. However, an individual is not eligible for employer coverage if the coverage offered is unaffordable or does not provide minimum value (see Practice Note, Employer Mandate Under the ACA: Overview: Affordability Requirement and Safe Harbors).

Defining Affordability Under Existing ACA Rules

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)). Also under the current rules, employer coverage is unaffordable for individuals who are eligible to enroll in employer coverage because of their relationship to the employee if the share of the annual premium the employee must pay for self-only coverage is more than the required contribution percentage of household income (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. The employee's share of premiums for family coverage is not considered in evaluating the affordability of employer coverage for related individuals.

Proposed Changes Would Change Affordability Rule for Related Individuals

After taking office in January 2021, the Biden administration issued an executive order directing Treasury to assess existing regulations and other guidance for consistency with the ACA's goal of expanding access to health coverage (EO 14009, 86 Fed. Reg. 7793 (Jan. 2021)). In carrying out this directive, Treasury reviewed (among other guidance) its (A)(2) regulation under which the affordability of employer coverage for related individuals was based on the employee's share of the annual premium for self-only coverage (rather than the cost of family coverage).
In light of what Treasury calls an alternative reading of the PTC statute, the proposed regulations would require separate affordability determinations for employees and for their family members. Under the proposed reading, an employer-sponsored health plan would be affordable for related individuals if the portion of the annual premium the employee must pay for family coverage (that is, the employee's required contribution) is not more than 9.5%of household income (as adjusted). Family coverage would mean all employer plans that cover any related individual other than the employee. This would include a self-plus-one plan for an employee who enrolls one other family member in the coverage. An employee's required contribution for family coverage is the portion of the annual premium the employee must pay for coverage of:
  • The employee.
  • All other individuals in the employee's family who are offered the coverage.
Although the proposed regulations would change the affordability rule for related individuals, they would not change the affordability rule for employees.

Individuals with Coverage from Multiple Employers

The proposed regulations would also provide that an individual with offers of coverage from multiple employers (either as an employee or a related individual) would have an offer of affordable coverage if at least one of the offers was affordable. For example, assume that:
  • Individual X is married and files a joint return with Individual X's spouse, Individual Y.
  • Individual X has offers of coverage from both Individual X's employer and Individual Y's employer.
In this example, Individual X has an affordable offer of coverage if either:
  • The self-only cost of Individual X's employer coverage is affordable.
  • The family cost of Individual Y's employer coverage is affordable.

Minimum Value Determinations for Related Individuals

Under the ACA, an employee is not eligible for employer coverage if the employer-sponsored plan does not provide minimum value (see Practice Note, Employer Mandate Under the ACA: Overview: Minimum Value). An employer's health plan provides minimum value if the plan's share of total allowed costs of benefits provided to an employee is at least 60% (regardless of the total allowed costs of benefits provided to a related individual). Because there is not a separate minimum value rule for related individuals based on the costs of benefits provided to related individuals, a PTC would not be allowed for a related individual who was offered coverage under a plan that:
  • Was affordable.
  • Provided minimum value to employees and not to related individuals.
The proposed regulations would include a similar minimum value rule for related individuals that is based on the level of coverage for related individuals under an employer's health plan. The proposed regulations would provide that an employer's health plan meets the minimum value requirement only if the plan's share of the total allowed costs of benefits provided to related individuals is at least 60% for employees.

Practical Impact

According to a related White House fact sheet, fixing the "family glitch" for employees' family members—under which these individuals are currently offered affordable self-only coverage but unaffordable family coverage—may (if finalized) result in large cost-savings for the family members.