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How millions were left behind by ACA’s ‘family glitch’

The 'family glitch’ has stranded several million Americans, leaving them ineligible for the Affordable Care Act's subsidies.

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.

Prior to 2014, individual health insurance in most states was much 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.

What is the ACA's 'family glitch?'

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% 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 9.83% of household income in 2021 (this might end up being reduced to 8.5% to keep pace with the other changes made by the American Rescue Plan, but the IRS has not issued guidance on this as of early April 2021).

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 9.83% of the household’s income in 2021. As long as the employee’s portion of the premium is affordable, the cost for the family could end up being 25% — or more — of their household income and they’d still have no access to premium subsidies. They can either pay full price in the individual market, or pay whatever the employer requires to cover the family on the employer’s plan, despite both options being financially unrealistic.

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% of income (but that’s indexed annually; it’s 9.83% in 2021, unless the IRS reduces it to 8.5% to align affordability with the newly enhanced premium subsidies under the American Rescue Plan). 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 relies on minuscule 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” for the spouse if the employer coverage simply isn’t available to the spouse. [But it should be noted that the spouse’s premium subsidy eligibility would still be based on the entire household’s income, which we’ll address in an example in a moment — the short story is that the spouse, applying for coverage on their own, might not end up being eligible for subsidies even with a fairly modest household income.]

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 (in 2020, the average employer paid nearly 74% of total family premiums). But not all of them do.

Who's affected by the 'family glitch?'

Somewhere between two million and six million people are impacted by the family glitch (a recent KFF analysis estimates that it’s 5.1 million). 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, the Children’s Health Insurance Program (CHIP) provides coverage for children with household incomes well over 200% of poverty in most states.

Are legislators trying to fix the 'family glitch?'

In 2014, then-Senator Al Franken introduced the Family Coverage Act, which would have adjusted the law so that the affordability test would be 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 improve access to health insurance for some of the people who are currently without any reasonably priced options because of the family glitch. The bill never progressed beyond committees though, and lawmakers seemed hesitant to fix the family glitch, given the additional burden it would place on the taxpayer-funded subsidy program.

Hillary Clinton proposed fixing the family glitch as part of her 2016 presidential campaign, but she lost the election and Congress remained under GOP control after the 2016 elections. Various pieces of legislation have been introduced in Congress in the last few years to fix the family glitch, but none of them have been enacted.

Although the American Rescue Plan does not fix the family glitch, the health care executive order that President Biden signed in January 2021 calls for “policies or practices that may reduce the affordability of coverage or financial assistance for coverage, including for dependents.” It’s possible that this hints that the administration may be considering administrative changes that would address the family glitch.

How will fixing the 'family glitch' help families?

Fixing the family glitch by making the spouse and/or kids eligible for subsidies won’t help everyone, and neither will employers dropping spousal coverage.

It’s been estimated that fixing the family glitch would increase federal spending by at least $4 billion, and by as much as $9 billion. The difference in cost depends on whether the whole family would become eligible for premium subsidies in the individual market, or just the employee’s spouse and/or dependents. And that’s a key distinction: Making the whole family eligible for premium subsidies would guarantee that they could access coverage for the entire family that cost less than 10% of their income (in 2021 and 2022, the threshold is 8.5%, and in some cases, quite a bit less than that — it varies depending on income).

But if a family glitch “fix” only makes the spouse and dependents eligible for subsidies, some families wouldn’t see much in the way of relief, because of the way premium subsidies are calculated. For example, consider a household in Chicago with two 40-year-old parents and two young children. Let’s say they earn $80,000, so about 305% of the federal poverty level (FPL). The kids are CHIP-eligible in Illinois, and we’ll assume that one parent has access to affordable coverage from an employer. But we’ll assume that the family has to pay the full cost of adding the other parent to the employer’s plan, and that it’s not affordable for them to do that.

If the law was changed to allow that spouse to have access to premium subsidies due to the employer-sponsored plan being unaffordable for the spouse, they still don’t qualify for a premium subsidy in the exchange, even with the American Rescue Plan’s premium subsidy enhancements. That’s because their expected contribution amount for the benchmark plan is roughly $4,904 (that’s 6.13% of their $80,000 household income). And the benchmark premium, in this case, is only about $4,135 in annual premiums, which is 5.17% of their household income. So the spouse can buy a plan in the exchange, but they aren’t going to get any subsidies.

This would also be the case if the employer just didn’t offer coverage to spouses at all, which is often proposed as a potential solution to the family glitch. It’s widely assumed that if the spouse isn’t eligible to participate in the employer’s plan and the family’s household income is in the subsidy-eligible range, the spouse would automatically be eligible for subsidies in the exchange. But oftentimes, that’s not going to be the case. That’s because the exchange is going to be looking at the premium for just the spouse on their own, and comparing it with the applicable percentage of the whole household’s income. Depending on where they live and how old they are, they may not be eligible for a subsidy at all, even if the family’s income is modest.

This is in contrast to a situation in which the spouse was a single individual, age 40, earning 305% of the poverty level for a single person — about $39,000 in 2021 — and thus eligible for a subsidy of about $145/month. This is most likely what people are picturing when they assume that the spouse would be eligible for a subsidy in this case, but we have to keep in mind that the subsidy is going to be calculated based on the household’s income.

But on the other hand, consider the same scenario but the parents are both 60, and either the employer doesn’t offer spousal coverage, or the law has been changed to allow the spouse to have access to a premium subsidy if the employer-sponsored plan isn’t affordable. Now, because the spouse’s individual market plan is much more expensive (since they’re 60 instead of 40), the spouse would get a subsidy of $323/month (this is larger than normal, due to the American Rescue Plan’s subsidy increases for 2021 and 2022). This is because the full-price premium for the spouse, on their own, would be well over 6.13% of the household’s income.

Clearly, there is not a one-size-fits-all solution. As with other aspects of health care reform, it’s complicated.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.

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