Quick HRAC explainer: The following policy blog discusses the recent “family glitch fix.” The HRA Council testified before Treasury Department and Internal Revenue Service leaders this summer, supporting a “family glitch fix” and asking them to clarify that families can combine an employer’s offer of an HRA with eligible tax credits. Even though HRAs are group plans, the IRS declined to create equity between a traditional group plan and an HRA, and the resulting rule disadvantages HRAs.
The rule states that “the Treasury Department and the IRS, in coordination with HHS and the U.S. Department of Labor (DOL), will consider whether future guidance should be issued to change the ICHRA affordability rules for related HRA individuals in the manner suggested by the commenter.” In this case, the commenter is the HRA Council. We are grateful to Treasury and the IRS for considering whether future guidance will be issued. We believe the rule should be updated to equalize the treatment of all group plans, including HRAs.
In the following policy review, Brian Blase delves more deeply into the rule and its consequences.
An October rule from the Internal Revenue Service fixed the so-called Affordable Care Act (ACA) family glitch by using the cost of a family plan to determine affordability and not the cost of a self-only plan. This fix expands access to premium tax credits (PTCs) to purchase exchange plans and will lead some dependents to shift from employer-based plans to exchange plans. However, the final rule did not extend the revised affordability measure to individual coverage health reimbursement arrangements (ICHRAs) or qualified small employee health reimbursement arrangements (QSEHRA), which creates an inequity. The IRS did indicate that it might revisit this issue in future guidance with the Department of Health and Human Services and the Department of Labor.
The Family Glitch and the Fix
In 2013, the IRS issued a rule, which it found to be the only one consistent with the ACA statute, that defined affordability with respect to the employer’s offer to the worker for self-only coverage. An affordable plan was one in which the cost to the employee of a self-only plan was less than about 10 percent of his or her household’s income. The affordability of the offer of employer coverage determines whether people in the household are eligible for a PTC to lower the net cost of an exchange plan. Thus, if the worker received an affordable offer of self-only coverage, then the worker was precluded from PTC eligibility.
At issue is that the worker’s dependents were also precluded from PTC eligibility regardless of whether the family plan was affordable or not so long as a family plan was made available to the worker. This is the so-called family glitch. Large employers needed to offer family coverage to comply with the ACA’s employer mandate, but there was no requirement on the amount of the contribution.
Many advocacy organizations were concerned that some families were left in situations where the employer offer of family coverage was unaffordable, and the worker’s dependents would not have access to PTCs to purchase an exchange plan. According to an analysis from Kaiser Family Foundation, 5.1 million dependents were in the family glitch in 2019. Of these 5.1 million, 85% were covered as a dependent on an employer plan, 6% directly purchased a plan, and 9% were uninsured.
On January 28, 2021, President Biden issued a health care executive order, which contained a directive to examine “policies or practices that may reduce the affordability of coverage or financial assistance for coverage, including for dependents.” In response to this order, the IRS proposed a rule in April 2022 that would strike its original interpretation and base affordability on family coverage. In October 2022, the IRS finalized the rule and the revised definition of affordability for the purchase of PTC eligibility.
Effect of the Family Glitch Fix
The practical effect of the rule is that that some offers of employer coverage for families that have been considered affordable in the past will be considered unaffordable in the future. The rule will boost individual market enrollment, but it will also discourage offers of affordable family health insurance from the employer, including ICHRAs and QSEHRAs, for family-based coverage.
Some families’ choices will also be altered. Currently, the vast majority of families in the glitch accepted the employer offer of family coverage. They will now have the ability to get a PTC to purchase an exchange plan. For some families staying on a unified group plan will likely make sense. For other families, splitting coverage (employee stays on the group plan but dependents go to an exchange plan with a PTC) will make sense.
The fix is also occurring after a significant increase in the PTCs enacted by Congress. From 2021-2025, Congress increased the size of PTCs for people already eligible for them (Congress did this by reducing the amount of income that households had to pay for a benchmark plan) and lifted the cap at 400 percent of the federal poverty level to make more people eligible for them. The enhanced subsidies, along with the family glitch fix, both discourage the offer of coverage for employers (dependent coverage in the case of the family glitch fix), especially for small employers. Many employers will be in situations where they can boost wages and not offer coverage, or not offer affordable dependent coverage, with workers and dependents able to access PTCs.
Overall, these policy changes will significantly boost individual market enrollment, although the enhanced subsidy effect is mostly already accounted for since it’s been in place for nearly two years.
The Effect of the Fix on ICHRAs
The proposed rule to fix the family glitch did not refer to ICHRAs or QSEHRAs. Many commenters, including the HRA Council, noticed this gap and sought answers from IRS on how the fix would affect workers who received offers of HRAs from their employers. The final rule included a section on the affect of the rule on ICHRAs.
For ICHRAs, the rule did not adopt a family coverage affordability standard and instead maintained affordability based on the employer contribution to self-only coverage. The rule affirms that dependents can access PTCs if the employee is offered an ICHRA that is solely for the reimbursement of his or her (meaning the employees’) health care expenses. The rule also states that if the ICHRA does extend to dependents, a PTC is not allowed if the offer is affordable. And affordability for ICHRAs remains a function of self-only coverage, not family coverage. Even though HRAs are group plans, the IRS declined to create equity between a traditional group plan and an HRA. In sum, an affordable ICHRA offer precludes PTCs for dependents if the HRA covers dependents’ expenses.
IRS wrote that “The proposed regulations do not address the affordability rules relating to an ICHRA offer, and, consequently, the final regulations also do not address ICHRAs.” This statement is a dodge from the IRS. If the Biden administration wanted to address ICHRAs in the final rule, they could have because of logical outgrowth from the comments made. They did not. Speculating on the failure to also amend the affordability standard for ICHRAs means that they likely didn’t have time to do so, that they didn’t have agreement on what to do, or that they are not inclined to support the growth of the HRAs.
If this inequity in the family glitch fix continues, employers, particularly at companies with below average wages, will be discouraged from offering ICHRAs or QSEHRAs that cover dependent expenses. Doing so would preclude PTC eligibility since affordability remains self-only coverage and not family coverage.
In its comments on the proposed rule, the HRA Council asked about whether an employee can combine their employer’s HRA contribution with the PTCs from dependents (if the employer offer to dependents was unaffordable) to purchase a single family plan in the exchange. The IRS did not explicitly address this comment, but it’s likely that such a policy change would need to be enacted by Congress.
Possibility of Future Guidance
The government left the door open to address the lack of parity between affordability standards for traditional group plans and ICHRAs. The rule states that “the Treasury Department and the IRS, in coordination with HHS and the U.S. Department of Labor (DOL), will consider whether future guidance should be issued to change the ICHRA affordability rules for related HRA individuals in the manner suggested by the commenter.”