Compliance Alert by: The Baldwin Regulatory Compliance Collaborative (BRCC)
IRS Fixes “Family Glitch” and Permits Two New Mid-Election Changes for Non-Calendar Year Plans
On October 11, 2022, the IRS released a final rule that changes the eligibility rules for the premium tax credit (PTC). On the same day, the IRS also issued guidance permitting additional cafeteria plan mid-year election changes for non-calendar year plans in IRS Notice 2022-41. Employer action items and a summary of the IRS guidance follows.
Employer Action Items
Employers should consider the following next steps:
- In terms of the expanded Internal Revenue Code (Code) Section 125 mid-year election change rules, employers with non-calendar year plans that wish to allow these election changes for employees (so that their employees’ family members may take advantage of their new eligibility for premium subsidies on the Exchange), must ensure specific criteria is met (as described below) and make certain to amend their cafeteria plans pursuant to the regulations, as indicated below.
- In terms of the finalized changes to the family coverage affordability rules, employers don’t need to take any action. The final rule simply provides that the affordability of employer-sponsored coverage for family members is determined based on the cost of family coverage with respect to eligibility for the PTC (which is available for Exchange health coverage).
IRS Finalizes Change to Family Coverage Affordability Rules
The final rule changes the eligibility rules for the PTC, effective January 1, 2023. By way of background, the PTC is available to eligible individuals who purchase health insurance coverage through the Exchange. Individuals are not eligible for the PTC if they have access to employer-sponsored health coverage that is affordable and provides minimum value. The affordability of employer-sponsored coverage for family members to purchase coverage in the Exchange will be determined based on the cost of family coverage. This fixes the “family glitch” in the Affordable Care Act (ACA) rule that based eligibility for a family’s premium subsidies solely on whether employer-sponsored health insurance coverage was affordable for the employee only, without considering whether it was affordable for the entire family. Specifically, in 2022, employer-sponsored coverage is deemed “affordable” if the cost for employee-only coverage is less than 9.61% of household income (this percentage will drop to 9.12% in 2023). With this final rule, the affordability determination for a family’s employer-sponsored health coverage will be based on the cost to cover the employee and his/her family members. Thus, as a result of this rule, more family members will likely be eligible for the PTC for coverage purchased through the Exchange.
However, please note that the final rule does not modify the affordability rules for employers. Applicable Large Employers (ALEs) are still required to offer affordable employer coverage based on the cost to the employee only or they will be penalized. In other words, nothing will change for plan sponsors in terms of their obligations under the ACA’s employer mandate. There is still no penalty if an employer offers coverage that is unaffordable for the family. This final rule only applies to a family member’s ability to receive a subsidy for coverage purchased in the Exchange.
IRS Expands Section 125 Mid-Year Election Change Rules
Relatedly, the IRS also issued guidance permitting additional cafeteria plan mid-year election changes in IRS Notice 2022-41. Specifically, participants in non-calendar year cafeteria plans are now allowed to prospectively revoke their elections for family coverage to permit one or more family members to enroll in health coverage through the Exchange either during a special enrollment period or during the Exchange’s open enrollment period, subject to certain conditions described below. Note: this guidance is optional for employers to adopt, as employers are not required to amend their plans to allow for this.
Existing rules do not allow the revocation of coverage when only related individuals, not the employee, become eligible to enroll in an Exchange plan. Thus, a family member enrolled in a non-calendar year cafeteria plan might not be able to synchronize the change in coverage to avoid either an overlapping period of coverage or a gap in coverage should they want to enroll in an Exchange plan. This guidance by the IRS fixes that issue.
In line with the new guidance, employers with non-calendar year cafeteria plans that wish to allow the new election changes must amend their cafeteria plans. Those plans can be amended to permit prospective mid-year revocations of family coverage under a group health plan (that is not a health FSA and that provides minimum essential coverage), provided the following conditions are satisfied:
- One or more related individuals are eligible for a special enrollment period to enroll in an Exchange plan pursuant to guidance issued by the Department of Health and Human Services and any other applicable guidance OR one or more already-covered family member(s) seeks to enroll during the Exchange’s annual open enrollment period; and
- The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the family member(s) in an Exchange plan for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked. If the employee does not enroll in a health plan through the Exchange, the employee must elect self-only coverage under the group health plan (or family coverage, if one or more already-covered related individuals did not enroll in an Exchange plan).
With respect to amending cafeteria plans, these amendments must be:
- Adopted on or before the last day of the plan year in which the elections are allowed (changes for plan years beginning in 2023 may be adopted at any time on or before the last day of the plan year that begins in 2024); and
- Effective retroactively to the first day of that plan year, provided the cafeteria plan operates accordingly and participants are informed.
Importantly, under no circumstances may an employer amend its cafeteria plan to allow an election to revoke coverage on a retroactive basis. The guidance further notes that plans may rely on the employee’s reasonable representation regarding enrollment or intended enrollment in a group health plan through the Exchange for new coverage that is “…effective beginning no later than the day immediately following the last day of the original coverage that is revoked.”
The guidance is for elections effective on or after January 1, 2023.
For questions regarding this Legislative Update or any other related compliance issues, please contact your Benefits Consultant.
The Baldwin Regulatory Compliance Collaborative
This Legislative Update was prepared by the Baldwin Regulatory Compliance Collaborative (the “BRCC”), a partnership of compliance professionals offering client support and compliance solutions for the benefit of the Baldwin Risk Partners organization, which includes: Jason Sheffield, BRP National Director of Compliance; Richard Asensio, Burnham Benefits Insurance Services; Nicole L. Fender, the Capital Group; Bill Freeman, AHT Insurance; Stephanie Hall, RBA/TBA; Caitlin Hillenbrand, AHT Insurance; Paul Van Brunt, Baldwin Krystyn Sherman Partners (BKS); and Natashia Wright, Insgroup.