IRS Finalizes Regs That Fix "Family Glitch" in Premium Tax Credit

(Parker Tax Publishing November 2022)

The IRS issued final regulations which provide that, for purposes of determining eligibility for the Code Sec. 36B premium tax credit (PTC), affordability of employer coverage for individuals eligible to enroll in the coverage because of their relationship to an employee of the employer (related individuals) is determined based on the employee's share of the cost of covering the employee and the related individuals. In addressing criticism that this expansion of the rules to allow more participation in the PTC is contrary to the statute, the IRS said that the affordability rule for related individuals in the final regulations represents a better reading of the relevant statutes and is consistent with Congress's purpose in enacting the Affordable Care Act to expand access to affordable health care coverage. T.D. 9968.

Background

Code Sec. 36B provides a premium tax credit (PTC) for applicable taxpayers who meet certain eligibility requirements. One such requirement is that a member of the taxpayer's family enrolls in a qualified health plan through a Health Insurance Exchange (Qualified Health Plan (QHP) or Exchange coverage) for one or more "coverage months." A taxpayer's family consists of the taxpayer, the taxpayer's spouse if filing jointly, and any dependents of the taxpayer. The PTC for a coverage month is the lesser of: (i) 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 (ii) 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 full calendar month (other than coverage under a health care plan offered in the individual market within a state). 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.

Code Sec. 36B(c)(2)(C) generally provides that an individual is not treated as 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. Under the affordability test, an employee who does not enroll in employer coverage is not treated as eligible for the coverage if the employee's required contribution under Code Sec. 5000A(e)(1)(B) with respect to the plan exceeds 9.5 percent (which is indexed for inflation) of the applicable taxpayer's household income. In addition, this provision also applies to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee.

Code Sec. 5000A, which was enacted by the Affordable Care Act (ACA) in 2010, generally requires applicable individuals to make an individual shared responsibility payment with their tax return if they do not maintain minimum essential coverage for themselves and any dependents. Code Sec. 5000A(e)(1) establishes exemptions from the individual shared responsibility payment that would otherwise apply for "individuals who cannot afford coverage," which is defined to be applicable individuals whose required contribution for coverage exceeds a specified percentage of their household income. Code Sec. 5000A(e)(1)(B)(i) provides that, for an employee eligible to purchase employer coverage, the term "required contribution" means "the portion of the annual premium which would be paid by the individual . . . for self-only coverage."

For related individuals, the definition of "required contribution" is modified by a special rule in Code Sec. 5000A(e)(1)(C) that provides that if an applicable individual is eligible for minimum essential coverage through an employer by reason of a relationship to an employee, the determination of affordability is made by reference to the required contribution of the employee. Regulations under Code Sec. 5000A interpret Code Sec. 5000A(e)(1)(C) as modifying the required contribution rule regarding coverage for related individuals to take into account the cost of covering the employee and the related individuals, not just the employee.

Specifically, for related individuals, Reg. Sec. 1.5000A-3(e)(3)(ii)(B) provides that the required contribution is the amount an employee must pay to cover the employee and the related individuals who are included in the employee's family. Thus, under Reg. Sec. 1.5000A-3(e)(3)(ii)(B), employer coverage is affordable for those related individuals if the share of the annual premium the employee must pay to cover the employee and the related individuals is not greater than the required contribution percentage of household income.

In contrast to the affordability rule for related individuals in Reg. Sec. 1.5000A-3(e)(3)(ii)(B), the IRS issued final regulations in 2013 for purposes of the PTC providing that employer coverage is affordable for the related individuals if the share of the annual premium the employee must pay for self-only coverage is not greater than the required contribution percentage of household income, regardless of how expensive the annual premium for family coverage would be. Thus, under the 2013 affordability rule, the employee's share of the premium for family coverage was not considered in determining whether employer coverage is affordable for related individuals.

Observation: Thus, when the 2013 regulations were issued, the IRS interpreted the language of Code Sec. 36B, through the cross-reference to Code Sec. 5000A(e)(1)(B), to provide that the affordability test for related individuals is based on the cost of self-only coverage. Consequently, if the cost of self-only coverage is affordable, no PTC is allowed for the Exchange coverage of related individuals even if family coverage through the employer costs more than 9.5 percent of household income.

In 2015, HHS finalized rules providing that an eligible employer-sponsored plan provides minimum value only if, in addition to covering at least 60 percent of the total allowed costs of benefits provided under the plan, the plan benefits include substantial coverage of inpatient hospital services and physician services. Subsequently, in 2015, the IRS issued proposed regulations under Code Sec. 36B to incorporate the substance of the HHS final regulations regarding the minimum value rule.

Proposed Regulations

In April of 2022, the IRS issued proposed regulations (REG-114339-21) to amend the 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 had become 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 could then be eligible for a PTC for such coverage.

The preamble to the proposed regulations noted that the proposed regulations would promote consistency between the affordability rules in Code Sec. 36B and Code Sec. 5000A and the rule in 42 U.S.C. Section 18081(b)(4)(C) (Section 18081(b)(4)(C)). Section 18081(b)(4)(C) relates to information that a QHP enrollee must provide as part of the enrollee's QHP application if the enrollee wants to be determined eligible for advance payments of the PTC (APTC) or cost-sharing reductions. Under Section 18081(b)(4)(C), if an employer offers minimum essential coverage to an individual seeking to enroll in a QHP, and the individual asserts that the offer does not preclude the individual from qualifying for APTC or cost-sharing reductions because it is not affordable, the QHP applicant must provide to the Exchange information on "the lowest cost option for the enrollee's or [related] individual's enrollment status and the enrollee's or [related] individual's required contribution (within the meaning of section 5000A(e)(1)(B) of title 26) under the employer-sponsored plan."

Certain commenters opined that they saw no inconsistency between the 2013 affordability rule under Code Sec. 36B, the affordability rule under Code Sec. 5000A, and the QHP applicant information rule in Section 18081(b)(4)(C). One commenter stated that Section 18081(b)(4)(C), by referencing Code Sec. 5000A(e)(1)(B), merely instructs Exchanges to determine "the portion of the annual premium which would be paid by the individual ... for self-only coverage" under the employer-sponsored plan. Another commenter argued that Section 18081(b)(4)(C), by using the term "or" and not "and," requires the submission of information on the required contribution solely for the employee who is offered employer coverage, meaning the individual who would pay the required contribution, but that the individual enrolling in the QHP could be the employee or someone related to the employee. This commenter further argued that in either case, the only information required by Section 18081(b)(4)(C) is the lowest cost option for self-only coverage and the required contribution for the applicable employee. The IRS agreed with the commenter who noted that Section 18081(b)(4)(C) requires the submission of information on the required contribution solely for the employee who is offered employer coverage and that the individual enrolling in the QHP could be the employee or someone related to the employee. However, the IRS disagreed with the conclusion of commenters that said Section 18081(b)(4)(C) requires Exchanges to collect information on only the portion of the annual premium that would be paid by the employee for self-only coverage under the employer-sponsored plan.

The IRS also rejected arguments that a change to the affordability rule for related individuals should be accomplished by legislative action, rather than regulatory action and that, while Congress has included language in various bills to amend the affordability rule, such legislation has not been enacted. Congressional inaction, such commentators argued, meant that the Treasury Department and the IRS are not empowered to issue regulations to address a matter that Congress acknowledges must be addressed in legislation. In rejecting this argument, the IRS quoted the Supreme Court which said that "failed legislative proposals are a particularly dangerous ground on which to rest an interpretation of a prior statute . . . Congressional inaction lacks persuasive significance because several equally tenable inferences may be drawn from that inaction, including the inference that the existing legislation already incorporated the offered change."

Final Regulations

The final regulations provide that, for purposes of determining eligibility for the PTC, affordability of employer coverage for individuals eligible to enroll in the coverage because of their relationship to an employee of the employer (related individuals) is determined based on the employee's share of the cost of covering the employee and the related individuals. According to the IRS, the affordability rule for related individuals in the final regulations represents the better reading of the relevant statutes and is consistent with Congress's purpose in the ACA to expand access to affordable health care coverage.

The final regulations also include amendments to (1) the rules relating to the determination of whether employer coverage provides a minimum level of benefits, referred to as minimum value; (2) conforming amendments to the current regulations; and (3) clarification of the treatment of premium refunds.

Compliance Tip: In conjunction with the issuance of these regulations, the IRS also issued Notice 2022-41 which expands the application of the permitted change-in-status rules for health coverage under a Code Sec. 125 cafeteria plan (cafeteria plan). In particular, the Notice addresses the situation in which, during a period of coverage (typically a plan year), a cafeteria plan participant may wish to revoke the employee's election under the cafeteria plan for other-than-self-only (family) coverage under a group health plan (other than a flexible spending arrangement) in order to allow one or more family members to enroll in a QHP through an Exchange in the individual market. See related article in this Federal Tax Bulletin issue.

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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