Newly released: IRS changed affordability rules for families
Employee impacts
Marketplace affordability calculation to change
When family members apply for financial help to purchase Marketplace coverage, the affordability determination will now be based on the total cost the employee pays to cover both the employee and their family. Previously, it was based only on the cost for an employee’s own coverage. This change is effective for 2023 tax years and beyond.
Increased access to affordable family coverage options
This, together with the increased subsidies through 2025 under the Inflation Reduction Act, will increase access to affordable family health insurance on the Marketplace.
More choice brings more complexity
Employees who choose to drop employer-based family coverage in favor of Marketplace options will need to track costs under each policy separately. For example, deductibles and out-of-pocket maximums apply on a per-policy basis and will not coordinate. This leads to new deductibles and out-of-pocket maximums at the time of coverage change. Provider networks may be different, too.
Employer impacts
ACA reporting stays the same for now
The final regulations promise that employer reporting using Forms 1095-C and 1094-C will not change. In addition, the safe harbors used to report the affordability of the lowest premium single coverage offered to employees remain the same. Employers should continue to diligently plan and prepare for 2022 ACA reporting, due in early 2023. A separate rule also recently adopted clarifies minimum value coverage must include hospital and physician services.
Expect more Marketplace employer notices
The White House estimates that nearly one million Americans may now see their coverage become more affordable.1 If Marketplace applications increase overall, employers should prepare for the possibility of an increase in the volume of eligibility determination notices and related administrative hassle.
Potential for increased penalty risk
The IRS notes in the text of the final rule that “whenever more employees of such [a large employer] are allowed a PTC, for any reason, the [employer’s] liability may grow.”2 What this means is that, although the new rule has no direct effect on an employer’s liability for ACA penalties, it could have an indirect effect. If an employer does not offer affordable, minimum value coverage to some of its employees, and those employees were previously ineligible for a PTC due to an offer of coverage by their spouse’s employer, those employees may now qualify for a PTC, triggering assessment of employer mandate penalties under Internal Revenue Code Section 4980(H). Employers should identify and address any deficiencies in their ACA compliance to minimize penalty risk.
Decide whether to allow mid-year Section125 plan changes
Finally, employers need to decide whether to permit family glitch related mid-year election changes to coverage after January 1, 2023. If adopted by the employer, IRS Notice 2022-41 permits employees enrolled in family coverage to prospectively switch to self-only coverage and change their salary reductions accordingly. This guidance is not mandatory; employers get to decide whether to amend their Section 125 plan document to allow this mid-year election change. Employers with non-calendar year plans who want to allow this change immediately would need to adopt the change effective January 1, 2023, communicate the change to employees, and operate the plan accordingly. Plans must be amended by the last day of the plan year in which they first allow the change, and the amendment may be effective retroactively to the first day of that plan year. For a plan year that begins in 2023, Notice 2022-41 states an employer may amend to adopt the new permitted election changes at any time on or before the last day of the plan year that begins in 2024.
American Fidelity Section 125 customers
If you’re using American Fidelity’s Section 125 recordkeeping services, you will receive a separate communication about how American Fidelity will handle this change.
If you’d like to know more about the ACA, Section 125, or how to review your plan documents and salary reduction agreements, contact your American Fidelity representative.
This blog is up to date as of October 2022 and has not been updated for changes in the law, administration or current events.
