Most employers that offer health insurance tend to be quite generous when it comes to subsidizing the cost of their employees’ premiums. And although many also pay a large portion of the cost to add dependents to the plan, it’s not uncommon to see a plan that requires significant employee contributions to cover dependents.
Over the years, many of our clients have purchased individual health insurance for their spouse and children specifically because their employer-sponsored plan became unaffordable when they added dependents.
In the past, individual health insurance was less expensive than it is now (not counting subsidies), but that’s because the coverage was less comprehensive, and also because eligibility hinged on an applicant’s medical history. So healthy families were able to purchase individual coverage for the spouse and children, while taking advantage of the employer subsidy that offset a good chunk of the employee’s premium. If medical issues were present though, the options were much more limited.
Thanks to the Affordable Care Act, that’s no longer the case, as medical history is not a factor in determining eligibility for coverage in the individual market. But the net price of individual health insurance varies considerably depending on whether an applicant qualifies for premium subsidies.
‘Glitch’ makes families ineligible for subsidies
We still get calls on a regular basis from people who are shopping for individual insurance because adding dependents to their employer plan is prohibitively expensive. We estimate that roughly 20 percent of the people who contact us are in this situation.
Unfortunately, due to a “glitch” in the ACA, they are not eligible for premium subsidies in the exchange if the amount the employee has to pay for employee-only coverage on the group plan is deemed “affordable” – defined as less than 9.66 percent of household income in 2016. (This is a slight increase from 9.56 percent in 2015, and it will increase again in 2017, to 9.69 percent).
It doesn’t matter how much the employee would have to pay to purchase family coverage. The family members are not eligible for exchange subsidies if the employee could get employer-sponsored coverage just for him or herself, for less than 9.66 percent of the household’s income.
This issue – known as the “family glitch” – was clarified by the IRS in a final rule published in early 2013, based on the language of the ACA. There are two main sections of the law that are involved: 36B deals with subsidies, and 5000A deals with the individual mandate and penalty.
In 36B, the law states that an employer plan is affordable as long as the employee’s required contribution doesn’t exceed 9.5 percent of income (9.66 percent in 2016). And to clarify “required contribution” we’re referred to the definition in 5000A, which states that it’s the amount that must be paid for self-only coverage.
When the IRS issued their final rule, the agency noted that some commenters had suggested that the earlier proposed regulation be modified to define the employee’s contribution as the total amount the employee must pay for family coverage. But ultimately the final rule was issued without changing the definition of the employee’s required contribution.
Health Affairs explains that this was not an accident or oversight – it was carefully considered and the final regulation was delayed while the Government Accountability Office and the IRS analyzed the impact of the decision. There were concerns that employers would increase the contributions required to enroll family members, which would push more people off employer plans and into the exchanges, driving up the total cost of subsidies. Ultimately, those concerns prevailed and the “family glitch” was born.
The ‘glitch’ and employer-sponsored plans
The family glitch – just like the King and Halbig cases – relies on miniscule bits of text within the ACA rather than the broad scope and intent of the law. The overarching goal of Obamacare was to expand access to health insurance, and to make it affordable. Yet the ruling on what constitutes “affordable” employer-sponsored coverage does nothing to make health insurance affordable or accessible for low- and moderate-income families whose employers don’t subsidize a significant portion of dependents’ coverage.
Under the ACA, employers with 50 or more full-time equivalent employees are required to offer coverage to their employees and to their employees’ children, but not to spouses – although it’s still relatively rare for companies to exclude spouses. If an employer plan doesn’t cover spouses at all, the spouse is eligible to get subsidies in the exchange based on income. (There’s no “glitch” if the employer coverage isn’t offered).
And if large employers don’t make the coverage affordable for the employee (self-only coverage) and the employee then obtains a subsidy in the exchange, the employer is subject to a penalty. So there is an incentive for employers to make sure that they are subsidizing a good chunk of the employee’s premium.
But while large employers are required to offer health coverage to employees’ children (and most also do so for spouses), there is no requirement that the employer pay for that coverage, because the cost of the dependents’ coverage is not factored into the “affordable” calculation. Many companies go above and beyond, subsidizing a large portion of dependents’ health insurance premiums. But not all of them do.
Affected families are disproportionately lower-income
Somewhere between two million and four million people are impacted by the family glitch. They are disproportionately lower-income, because lower-wage workers have to spend a larger percentage of their income to pay for health insurance if subsidies aren’t available, and because higher-income workers are more likely to work for companies that heavily subsidize coverage for dependents.
Fortunately for many of the families caught by the glitch, Children’s Health Insurance Program (CHIP) provides coverage for children with household incomes well over 200 percent of poverty in most states. CHIP funding was scheduled to expire in the fall of 2015, but H.R. 2 extended CHIP funding for another two years, through the fall of 2017.
Most of the ACA’s regulations apply to individual and small group plans, because for the most part, large group plans were already offering solid coverage prior to 2014. Not all large groups were offering coverage though – particularly those with low-wage workers – and now they’re required to do so. And because of a loophole in the ACA, some of them are offering skimpy bare-bones plans that do not provide adequate coverage (California has banned such plans, under A.B.248, which was signed into law in late 2015).
The IRS proposed regulations in 2014 that would prohibit such plans from being considered acceptable under the minimum value standards, which means that large employers would no longer be able to offer them and avoid a penalty. The regulation was finalized in 2015, but the IRS also clarified that in the meantime, people who were offered such plans through their employers were eligible to receive premium subsidies in the exchange instead. So for those employees and their families, the ACA is working: they are not stuck with a subpar plan simply because it’s available to them.
But for families that have the option to enroll in an employer plan – large or small – that does provide minimum value, the choice can sometimes come down to a rock or a hard place, with no way to purchase coverage that fits within the ACA’s definition of “affordable.”
It’s small consolation, but people caught in the family glitch are not subject to the ACA’s individual mandate penalty if the only plans available to them cost more than 8.13 percent of their income. For most people though, having realistic access to health insurance would be far preferable to simply avoiding the penalty while remaining uninsured.
In 2014, Senator Al Franken introduced the Family Coverage Act, which would adjust the law so that the affordability test is applied to the entire premium that a worker must pay for family coverage, not just employee-only coverage. This would cost the government more in subsidies, but it would dramatically improve access to health insurance for the people who are currently without any reasonably priced options because of the family glitch. The bill has not progressed beyond committees though, and lawmakers seem hesitant to fix the family glitch, given the additional burden it would place on the taxpayer funded subsidy program.