The Affordable Care Act is not a perfect bill. We knew that from the beginning, and, more than a decade later, there are still a lot of aspects of the massive health care law that could use some improvement. But there’s one provision in particular that, from the beginning, has been referred to as a “glitch.” That’s the provision that blocks most family members from receiving a premium tax credit in the individual market if one of the adults in the household is offered health insurance through his or her employer.
Known as the “family glitch,” this rule determines affordability for family members not based on the cost of family coverage but rather on the cost of single—employee only—coverage when compared with household income. That, of course, doesn’t make any sense, which is why it’s called a glitch.
Health Affairs wrote an article on the family glitch back in 2014, shortly after the premium tax credits first became available, and the problem still isn’t fixed. Here’s how the article explains it:
Eligibility [for the premium tax credits] is not solely determined by income. It is also subject to whether a family has access to affordable employer-sponsored insurance. The problem is that the definition of "affordable"--for both an individual employee and a family--is based only on the cost of individual-only coverage and does not take into consideration the often significantly higher cost of a family plan.
Perhaps an example would help. Let’s say that an employer offers group health coverage providing minimum value to its full-time employees. The monthly premium for employee-only coverage is $500, and the employer subsidizes the cost by paying 50% of the employee premium. While family members are eligible to enroll in the plan, the employer does not contribute toward the cost of dependent coverage.
In order for the employee to waive coverage on the group plan and instead sign up for subsidized coverage in the individual market, the group coverage would need to be unaffordable. That means that the cost of the employee coverage, after accounting for the employer contribution, would need to exceed 9.83% of his household income in 2021 according to Healthcare.gov.
Doing the math, the employee’s cost of $250 per month for the group health plan equals $3,000 per year. And $3,000 is 9.83% of $30,518. If the employee’s household income is above this amount, then the plan would be considered affordable and the employee would be blocked from receiving a premium tax credit. That part makes sense.
Here’s the crazy part, though. For the employee’s family members, as long as the cost of single coverage is less than 9.83% of the household income, they, too, are blocked from receiving a premium tax credit. If the employee has a spouse and two children and the monthly premium for family coverage is $1,500 per month, the employee would need to pay a total (after the employer contribution) of $1,250 per month. That’s $15,000 per year. If the household income is right at that cutoff point of $30,518 per year, then that means that the family would be paying nearly 50% of its annual household income for the employer coverage. Yet, thanks to the family glitch, it would still be considered affordable and the entire family would be blocked from receiving a premium tax credit. That, of course, makes no sense at all.
Unfortunately, this “glitch” is not something that can be corrected by federal regulators. Because of the way the Affordable Care Act is written, it will literally take an Act of Congress to correct the family glitch, and Congress isn’t acting. Lawmakers have known about this issue for years, yet they’ve done nothing to fix it.
Now, under the American Rescue Plan Act, the premium tax credits in the individual market have been significantly enhanced and nearly everyone without access to affordable, employer-sponsored coverage will be eligible for a tax credit through the end of 2022.
What will be interesting is to see whether the increased tax credits cause small employers to reconsider the value of their group health coverage. If the group plan blocks not only the employees but also their family members from receiving significant financial assistance from the government, it’s possible that the employer-sponsored plan could be doing more harm than good. If you sell both group and individual coverage, it may be worth a discussion with your small group clients. Would they do better dropping the group coverage, letting the employees and their family members benefit from the enhanced tax credits, and redirecting those employer funds to dental, vision, and other ancillary benefits?