Under the Affordable Care Act, Americans can enroll in a health insurance plan in the individual market regardless of whether or not they have access to an employer-sponsored health insurance (ESI) plan. But subsidy eligibility is impacted by access to an employer-sponsored plan.
If a person has access to an employer-sponsored plan – either as an employee or as a dependent – eligibility for subsidies in the Marketplace/exchange depends on the cost of the employer-sponsored plan, and also on the level of coverage it provides.
Subsidies in the exchange/Marketplace are not available to people with access to an employer-sponsored plan if the employer-sponsored plan is considered affordable and provides minimum value. Here’s how those are defined:
Is the plan affordable?
An employer-sponsored plan is considered affordable in 2023 if the employee’s share of the premiums is no more than 9.12% of household income. Note that this threshold changes each year; it was 9.83% in 2021, and 9.61% in 2022.
And it will drop to the lowest level ever — 8.39% of household income — in 2024. Note that the affordability calculation follows the plan year rather than the calendar year. So if an employer’s health plan doesn’t follow the calendar year, the switch to the 8.39% affordability test wouldn’t happen until the date the plan year begins in 2024. This is often January 1, but not always.
(The version of the Build Back Better Act that passed the House in 2021 would have set it at 8.5% of household income from 2022 through 2025, but that legislation stalled in the Senate. A scaled-back version — the Inflation Reduction Act — was enacted in August 2022, but it did not make any changes to the affordability determination for employer-sponsored health coverage. So the IRS adjustment that was issued in August 2022 became applicable in 2023, setting the affordability limit for employer-sponsored coverage at 9.12% of household income. Note that the same IRS guidance also included inflation-adjusted applicable percentages regarding the amount that people who buy their own health coverage would have to pay for the benchmark plan. But those did not take effect in 2023, due to the Inflation Reduction Act.)
If the employee’s share of the premiums exceeds 9.12% of household income in 2023 (or 8.39% in 2024), the employer-sponsored plan is considered unaffordable, and the employee and dependents are eligible for subsidies in the exchange. Given the drop in the affordability threshold for 2023 and the subsequent drop that will come in 2024, some large employers with lower-wage workers may have needed to reduce the amount that the employee had to pay for health insurance premiums in order to keep the coverage affordable under the 2023 and 2024 guidelines (but that would also depend on what safe harbor method the employer uses, and if it’s based on employees’ wages or rate of pay, whether those amounts increase each year).
Employers can offer affordable group health insurance, or they can choose to offer an ICHRA that’s substantial enough to make the employee’s cost for the second-lowest-cost silver plan in the exchange/marketplace equal to no more than 9.12% of the employee’s household income in 2023 (or 8.39% of household income in 2024). Small businesses also have the option to offer a QSEHRA (small businesses are not required to offer coverage, but if they do offer it and it’s considered affordable, the employee is not eligible for subsidies in the marketplace).
How does the family glitch fix affect the affordability determination?
From 2014 through 2022, the affordability test was only applied to the employee’s portion of the premiums; the cost to add dependents to the employer-sponsored plan was not considered. Regardless of how much it cost to add dependents to the employer-sponsored plan, they were not eligible for subsidies in the exchange if the employer-sponsored plan was considered affordable for the employee alone. This was known as the “family glitch.”
But the Biden administration finalized a family glitch fix effective for 2023 and future years. Some families are newly eligible for premium subsidies as a result of this fix, but it won’t help all families that have been caught by the family glitch.
Large employers are required to offer coverage to employees and their children, but there’s no requirement to offer coverage to employees’ spouses. That continues to be true in 2023 and future years. And if the spouse is ineligible for the employer-sponsored plan, he or she is potentially eligible for subsidies in the exchange assuming that other eligibility requirements are met (this was already true, even without the family glitch fix, but not all spouses in that situation end up actually qualifying for premium tax credits).
Through the end of 2022, if the spouse and/or dependents were eligible for employer-sponsored coverage and the employer’s plan was considered affordable for the employee alone, the entire family was ineligible for premium subsidies. But starting with 2023 coverage, the family members can potentially qualify for premium subsidies in the exchange if the cost for employer-sponsored family coverage would be more than 9.12% of household income (again, that threshold is indexed annually; it will be 8.39% of household income in 2024).
It should be noted that affordability determinations for ICHRAs and QSEHRAs are not changed by the IRS rule change to fix the family glitch. The rule change only applies to affordability determinations for employer-sponsored group health plans, but not to health reimbursement arrangements (see Section E of the final rule, which discusses QSEHRAs and ICHRAs).
How is affordability determined if the employer offers multiple plans?
If an employer offers multiple coverage options, the affordability test is based on the least expensive option (as long as it provides minimum value, as described below), regardless of which option the employee selects.
And the affordability test applies separately to each policy that the household might have, regardless of the total combined premiums. For example, if each spouse has a separate plan from an employer, the affordability test is based on how each plan’s premium compares with the household’s total income, rather than comparing how the total amount of combined premiums compares with the household income.
But large employers tend to use safe harbor methods to ensure that the coverage they’re offering is affordable. These methods are based on the employee’s rate of pay, the employee’s W-2 wages, or the federal poverty level, since employers generally don’t have any way of knowing an employee’s household income.
Does the plan provide ‘minimum value’?
The employer-sponsored plan provides “minimum value” if it covers at least 60% of average costs for a standard population (ie, an actuarial value, or AV, of 60 or above) and includes “substantial coverage” for inpatient care and physician services. Bare-bones coverage that has AV lower than 60 does not provide minimum value, and people who are offered such plans are still eligible for subsidies in the exchange.
HealthCare.gov has an “employer coverage tool” that enrollees can use to determine whether the employer-sponsored coverage available to them is affordable and provides minimum value. The employer completes the form, and the enrollee uses the information on the form when enrolling in a plan through the exchange.
Exchange subsidies are not available to people who have access to affordable, minimum value insurance through an employer, regardless of whether the person is enrolled in the employer-sponsored plan. If you’re eligible for the employer-sponsored plan under the employer’s rules but missed the enrollment window or chose not to enroll, you’re still considered eligible for an employer-sponsored plan, and not eligible for premium subsidies if the guidelines above are met. (Note that large employers report this information to the IRS on Form 1095-C.)
If an employer offers multiple plan options, as long as one of them meets both the minimum value and affordability test, the employee and any eligible dependents cannot opt instead to purchase subsidized coverage in the exchange. This is true even if the employer also offers plans that don’t meet the affordability and/or minimum value tests.
Note that the IRS regulations that fix the family glitch also include a minimum value test for the coverage that’s offered to the family members. If the family is not offered a plan that provides minimum value (and/or that isn’t affordable), the family members can potentially qualify for premium subsidies in the exchange.
A change in your ESI can trigger a SEP
If your employer-sponsored insurance was previously affordable and offered minimum value, you weren’t eligible for subsidies in the exchange to offset the cost of an individual market plan.
But if the employer-sponsored insurance later becomes unaffordable OR the coverage is reduced such that it no longer provides minimum value, and if you are otherwise eligible for subsidies in the exchange based on your income, you’ll have access to a 60-day special enrollment period in the exchange.
Effective dates follow the normal rules, so in most states, coverage will be effective the first of the month following enrollment.
This SEP only applies in the exchange, as it’s predicated on the applicant becoming eligible for premium subsidies, which aren’t available outside the exchange.
The SEP can be triggered by an increase in premiums for the employer-sponsored plan such that the portion the employee has to pay (for employee-only coverage, not counting dependents) goes above 9.12% of household income in 2023, or above 8.39% of household income in 2024. This situation could also be triggered by a drop in income (including due to a reduction in hours) without an accompanying reduction in the premium that the employee has to pay for his or her own coverage through the employer-sponsored plan.
The SEP can also be triggered by the employer dropping coverage altogether, or making changes to the plan that bring it below the minimum value threshold. The ACA’s employer mandate requires businesses with 50 or more full-time equivalent employees to offer coverage that meets minimum value requirements, but employers can choose not to, and pay the applicable penalties instead. And employers with fewer than 50 employees are not required to offer coverage at all.
And as a result of the family glitch fix, the IRS clarified that employers could allow employees to make a cafeteria plan coverage election change to remove family members from an employer-sponsored plan as of January 2023, in order to take advantage of newly available premium subsidies in the marketplace. (Note that although the final rule on the family glitch fix indicates that “employees will be permitted under the notice to revoke coverage in an employer plan associated with a cafeteria plan beginning in 2023,” Notice 2022-41 actually just permits employers to allow this, but does not require them to do so.) But if your employer adopted the provisions in IRS Notice 2022-41 and the employer’s plan doesn’t follow the calendar year — meaning you would not normally be able to make a change to your coverage on January 1 — you would have had the option to switch your family members to a plan purchased in the exchange during the open enrollment period in the fall of 2022, and drop them from your employer’s plan when the exchange plan took effect.
After that, the employer’s normal annual open enrollment period (which is often in the fall but can happen at any time of the year) would give you an annual opportunity to reconsider your coverage options. If you wanted to transition some or all of your family members to individual/family coverage instead, that’s possible during your employer’s open enrollment period. You would have an opportunity to enroll in a plan through the exchange at that point, since it would either overlap with the annual open enrollment period for individual coverage, or you would be eligible for a special enrollment period due to the non-calendar-year renewal/termination of your group coverage.
(If you’re uncertain about your eligibility for a special enrollment period, call (619) 367-6947 to discuss your situation with a licensed insurance professional.)
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 healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.