Proposed Regs Would Amend Premium Tax Credit to Fix "Family Glitch" in Affordable Care Act

(Parker Tax Publishing April 2022)

The IRS issued proposed rules under Code Sec. 36B that would amend the premium tax credit (PTC) regulations to provide that affordability of employer-sponsored minimum essential coverage (employer coverage) for family members of an employee is determined on the employee's share of the cost of covering the employee and those family members, not the cost of covering only the employee. Thus, the proposed regulations would fix what is known as the "family glitch" in the Affordable Care Act and would (1) add a minimum value rule for family members of employees based on the benefits provided to the family members and (2) affect taxpayers who enroll, or enroll a family member, in individual health insurance coverage through a Health Insurance Exchange and who may be allowed a PTC for the coverage. REG-114339-21.

Background

Under Code Sec. 36B, applicable taxpayers who meet certain eligibility requirements, including that a member of the taxpayer's family enrolls in a qualified health plan (QHP) through an Exchange for one or more coverage months, are eligible for a premium tax credit (PTC). A taxpayer's family consists of the taxpayer, the taxpayer's spouse if filing jointly, and any dependents of the taxpayer. Reg. Sec. 1.36B-3(d)(1) provides that the PTC for a coverage month is the lesser of: (1) the premiums for the month, reduced by any amounts that were refunded, for one or more QHPs in which a taxpayer or a member of the taxpayer's family enrolls (enrollment premiums); or (2) the excess of the adjusted monthly premium for the applicable benchmark plan over 1/12 of the product of a taxpayer's household income and the applicable percentage for the tax year (taxpayer's contribution amount).

Under Code Sec. 36B(c)(2)(B) and Reg. Sec. 1.36B-3(c), a month is a coverage month for an individual only if the individual is not eligible for minimum essential coverage (MEC) for that month (other than coverage under a health care plan offered in the individual market within a state). Under Code Sec. 5000A(f)(1)(B), the term "MEC" includes employer coverage. If an individual is eligible for employer coverage for a given month, no PTC is allowed for the individual for that month.

Generally, Code Sec. 36B(c)(2)(C) provides that an individual is not eligible for employer coverage if the coverage offered is unaffordable or does not provide minimum value. However, if the individual enrolls in employer coverage, the individual is eligible for MEC, irrespective of whether the employer coverage is affordable or provides minimum value. Employer coverage is generally unaffordable for an 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. The required contribution percentage is 9.5 percent and is indexed annually.

Likewise, employer coverage is generally unaffordable for individuals eligible to enroll in employer coverage because of their relationship to the employee (related individuals) 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. Thus, the employee's share of the premium for family coverage is not considered in determining whether employer coverage is affordable for related individuals. An eligible employer-sponsored plan provides minimum value only if the plan's share of the total allowed costs of benefits provided to an employee is at least 60 percent.

President Biden's Executive Order

On January 28, 2021, President Biden issued Executive Order (EO) 14009, Strengthening Medicaid and the Affordable Care Act (ACA). The EO directs the Secretary of the Treasury to review, as soon as practicable, all existing regulations and other agency actions to determine whether the actions are inconsistent with the policy to protect and strengthen the ACA. It also directs the Secretary of the Treasury, as part of this review, to examine policies or practices that may reduce the affordability of coverage or financial assistance for coverage, including for dependents. Consequently, the Treasury Department and the IRS have reviewed the regulations under Code Sec. 36B, including Reg. Sec. 1.36B-2(c)(3)(v)(A)(2), which provides that the affordability of employer coverage for related individuals is based on the employee's share of the annual premium for self-only coverage, not the cost of family coverage. The Treasury Department and the IRS have tentatively determined that the rule in Reg. Sec. 1.36B-2(c)(3)(v)(A)(2) is not required by the relevant statutes and is inconsistent with the overall purpose of the ACA to expand access to affordable health care coverage. As a result, proposed regulations were issued to fix this problem which has become known as the "family glitch."

Proposed Regulations

In the preamble to the proposed regulations, the IRS points out that under the current rules, a PTC is not allowed for children and other family members who have been offered employer coverage if the cost of the employee's self-only coverage is affordable, regardless of the employee's cost to cover those family members. Many of these families purchase health insurance, either through a family member's job or an Exchange, but pay high portions of their income towards premiums and other families forgo coverage altogether due to the high premium costs.

The IRS has preliminarily determined that Code Sec. 36B(c)(2)(C)(i) does not compel the result that if self-only employer coverage is affordable for an employee, then the coverage also is affordable for a spouse and any dependents. To the contrary, it believes that the statute is better read to require a separate affordability determination for employees and for family members. The IRS is also now of the view that the interpretation in the current regulations unduly weakens the ACA by basing affordability solely on the premium cost for the employee's self-only coverage and, therefore, the interpretation in the current regulations is contrary to the policy of the ACA to expand access to affordable health care coverage.

According to the IRS, the statutory language in Code Sec. 36B(c)(2)(C)(i)(II) supports two different readings. Under one reading, reflected in Reg. Sec. 1.36B-2(c)(3)(v)(A)(2), the affordability rule for related individuals is determined solely by reference to Code Sec. 5000A(e)(1)(B), without the modification to that section for related individuals provided by Code Sec. 5000A(e)(1)(C). This reading results in affordability being determined based on the cost of self-only coverage to the employee. Under an alternative reading, however, the affordability rule for related individuals is determined by reference to Code Sec. 5000A(e)(1)(B), but also encompasses the modification of Code Sec. 5000A(e)(1)(B) by Code Sec. 5000A(e)(1)(C), which provides a special rule for related individuals.

The proposed regulations would adopt the alternative reading, which the Treasury Department and the IRS have preliminarily concluded is the better reading of these provisions. Under this interpretation, because Code Sec. 5000A(e)(1)(C) begins with the language "[f]or purposes of [Code Sec. 5000A(e)(1)](B)(i)," the parenthetical cross reference in Code Sec. 36B(c)(2)(C)(i)(II) to Code Sec. 5000A(e)(1)(B)(i) is understood to incorporate the special rule in Code Sec. 5000A(e)(1)(C) that modifies the required contribution rule in Code Sec. 5000A(e)(1)(B)(i) when the coverage in question is for related individuals. Under this interpretation, a specific reference in the flush language of Code Sec. 36B(c)(2)(C)(i) to Code Sec. 5000A(e)(1)(C) is not necessary to require the consideration of Code Sec. 5000A(e)(1)(C) in determining affordability for related individuals for Code Sec. 36B purposes.

According to the IRS, the proposed amendment to the affordability rule for related individuals would create greater consistency between the affordability rules in Code Sec. 36B(c)(2)(C)(i) and the affordability rules in Code Sec. 5000A(e)(1). The proposed amendment would also promote consistency between the affordability rules in these provisions and 42 U.S.C. 18081(b)(4)(C), which requires Exchange applicants to separately provide the required contributions of employees and of related individuals in order to determine PTC eligibility; in the Treasury Department's and the IRS's view, the requirement to provide this information would make little sense if PTC eligibility depended only on the cost to the employee for self-only coverage. In addition, the proposed amendment would also support efforts to achieve the goal of the ACA to provide affordable, quality health care for all Americans.

The proposed regulations would provide that an eligible employer-sponsored plan is 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, does not exceed 9.5 percent of household income. For this purpose, family coverage means all employer plans that cover any related individual other than the employee, including a self plus-one plan for an employee enrolling 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 and all other individuals included in the employee's family who are offered the coverage. Some individuals who are not part of the tax family might nonetheless be offered the employer coverage. For example, children up to age 26 might be offered coverage by the taxpayer's employer, but those adult children might not be reported on the employee's tax return because they do not qualify as dependents of the employee. The cost of covering individuals who are offered the coverage but are not in the employee's family is not considered in determining whether the employee's family members have an offer of affordable employer coverage, regardless of whether the non-family member enrolls in the coverage. That is because, under Reg. Sec. 1.36B-2(c)(4)(i), a related individual who is not a spouse filing jointly with the employee or a dependent of the employee, such as a child of the employee who is no longer the employee's dependent, is treated as eligible for the employer coverage only if he or she is enrolled in the coverage. Consequently, a related individual who is not a spouse filing jointly with the employee or a dependent of the employee does not need a determination of unaffordable coverage to be eligible for the PTC. As a result, the cost of covering that individual should not be considered in determining whether other related individuals have an offer of affordable employer coverage.

Finally, the IRS notes that the proposed regulations would make changes only to the affordability rule for related individuals; they would make no changes to the affordability rule for employees.

Effective Date

Prop. Reg. Secs. 1.36B-2, 1.36B-3, and 1.36B-6(a)(2) are proposed to apply for tax years beginning after the date the regulations are finalized. According to the IRS, the federally-facilitated Exchange would be ready to implement the proposed changes before the open enrollment for 2023 coverage. Prop. Reg. Sec.is proposed to apply for tax years ending after December 31, 2013. Prop. Reg. Sec. 1.36B-6(a)(1)(ii) is proposed to apply for plan years beginning after November 3, 2014.

For a discussion of affordable coverage and taxpayers eligible for the premium tax credit, see Parker Tax ¶102,610.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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