IRS Affordability Rule Changes for Families: What HR Should Know
In addition to open enrollment and year-end housekeeping, Q4 often comes with the added stress of interpreting legislation that will take effect in the new year. This year is no different, and one change in particular may affect organizations that offer employer-sponsored health plans to employees—and their families.
Read on for what changes the new IRS rule will bring and how it could affect HR at your organization.
What Is the IRS Affordability Rule for Health Coverage?
An applicable large employer, or ALE, is an organization that employs at least 50 full-time employees, including full-time equivalent employees, on average during the prior calendar year. Under the Affordable Care Act, applicable large employers must offer their employees a health plan that provides minimum essential coverage.
But if that plan is not affordable, employees may be eligible for subsidized (i.e., less expensive) coverage through the ACA marketplace. What makes a plan “affordable”? According to current regulations, a plan is affordable if it costs no more than 9.12% of an employee’s income.
But that means coverage may be affordable for the employee individually without being affordable for the family as a whole. As long as individual coverage stayed under that threshold, a spouse or dependent would also not be eligible for ACA subsidies—even if total family coverage cost more than 9.12% of the total family’s income.
How Is the IRS Health Coverage Affordability Rule Changing?
A new IRS rule in effect for tax year 2023 aims to correct this so-called “family glitch.” Under the Affordability of Employer Coverage for Family Members of Employees rule, employee spouses and dependents will qualify for marketplace subsidies as long as whole-family coverage exceeds 9.12% of household income.
Starting in 2023, then, these family members will have access to premium subsidies that may substantially lower their health coverage costs. Keep in mind, however, that this change affects spouse and dependent subsidies under the ACA, but not those of the employee, whose individual employer-sponsored plan will still be counted as affordable.
In an official statement, the White House estimated that “‘About 1 million Americans will either gain coverage or see their insurance become more affordable as a result of the new rule.”
How Does the New IRS Affordability Rule Affect HR?
When preparing for this ruling to take effect in 2023, it’s important to note some key factors that it won’t change:
- No change in employer mandate. Because this rule only affects whether an employee’s family gets subsidies, and not the employee themselves, it won’t impact the mandate for ALEs to offer coverage. That means you won’t have to recalculate your full-time or full-time equivalents for ALE status in response to the ruling.
- No change in reporting requirements. While these announcements often come with new administrative responsibilities, the IRS stated in the final rule that “nothing in these final regulations affects any information reporting requirements for employers, including the reporting required.” That includes Form 1095-B and Form 1095-C, neither of which is expected to change in response.
On the other hand, several impacts—for better or worse—are possible:
- Decline in family coverage requests. If your organization is in open enrollment right now, it’s possible you’ll see fewer requests for family coverage than in previous years. Some of your employees may elect individual coverage now that their families qualify for lower costs through the ACA marketplace. This shift could ultimately reduce employer costs, depending on their plan offerings.
- Adverse selection. Critics of the ruling suggest that in general, those who switch from employer family plans to ACA plans will be younger, healthier people who will choose higher-deductible plans with less robust benefits through the ACA in order to get lower premiums. If that happens, adverse selection may increase employer-sponsored plan costs as the balance shifts slightly toward those who are older or have existing health conditions.
Since one possible effect could lower employer costs and the other could increase them, it’s too soon to know for sure how the impacts will pan out. Consider the unique needs and circumstances of your team as you plan for this new rule in tax year 2023.
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