The IRS has proposed regulations that would change the eligibility standards for an Affordable Care Act (ACA) premium tax credit (PTC) by providing that affordability of employer-sponsored coverage for an employee’s family members would be based on the employee’s cost to cover the employee and those family members, rather than the cost of employee-only coverage. As background, the ACA established PTCs for individuals who enroll in a qualified health plan (QHP) through an Exchange. However, an individual is not eligible for a PTC if, among other limitations, the individual is eligible for affordable, minimum value coverage under an employer-sponsored plan. Employer-sponsored coverage is considered affordable if the required employee contribution for self-only coverage does not exceed 9.5% of the employee’s household income. (The 9.5% threshold is indexed—see our Checkpoint article.) Minimum value is determined solely by reference to the employee’s coverage. Current regulations provide that if self-only minimum value coverage under an employer-sponsored plan is affordable for an employee, then the coverage is also affordable for a spouse with whom the employee is filing a joint return and any dependents of the employee who may be eligible to enroll in the employer coverage. Under these circumstances, neither the spouse nor dependents would qualify for a PTC, regardless of the required employee contribution for their coverage or whether their coverage provides minimum value.
The IRS has now “preliminarily” concluded that the ACA should be interpreted to require a separate affordability determination for employees and for related individuals, rather than basing affordability on the required employee contribution for employee-only coverage. Accordingly, the proposed regulations would provide that an eligible employer-sponsored plan is affordable for related individuals (disqualifying them from a PTC) only if the required employee contribution for family coverage does not exceed 9.5% (indexed) 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 related individual. Special rules address offers of employer-sponsored coverage to relatives who are not tax dependents, coverage offers from multiple employers, and part-year offers. The proposed regulations would also establish a separate minimum value rule for related individuals. Thus, related individuals would not lose PTC eligibility if the offered employer plan did not provide minimum value coverage to them, regardless of the plan’s cost. As part of this proposal, the IRS is reproposing 2015 regulations that would expand the definition of minimum value to require substantial coverage of inpatient hospital services and physician services (see our Checkpoint article).
EBIA Comment: Despite the anticipated expansion of eligibility for PTCs, the proposed regulations (which are expected to apply for taxable years beginning in 2023) should not increase exposure to employer shared responsibility penalties, since those penalties are based on affordability and minimum value for employees’ coverage, not coverage for family members. Still, the proposal would likely affect employer-sponsored plans. For example, some employers may see a shift from family coverage to self-only coverage if family members become eligible for PTCs and prefer QHP coverage over employer coverage. Applicable large employers may also foresee additional Code § 6056 reporting obligations since, to administer family-member PTCs, the IRS would need information on the required employee contribution for family coverage and whether the coverage provides minimum value. For more information, see EBIA’s Health Care Reform manual at Sections XXI.G (“Premium Tax Credits”) and XXVIII.E (“Assessable Payment (Penalty Tax) When Inadequate Coverage Offered to Full-Time Employees and Dependents (the ‘Subsection (b) Penalty’)”).
Contributing Editors: EBIA Staff.