New ACA Affordability Rule May Require Employers to Collect Family Income Data

A new rule proposed by the IRS would eliminate the so-called “family glitch” by changing ACA affordability tests, meaning employers would likely need to collect family income data from employees.

Background: Under current ACA rules, eligibility for premium tax credits for an employee and their family members hinges on whether the employee has an “affordable” offer of coverage from their employer. A plan is considered “affordable” when self-only coverage does not exceed 9.61 percent of the employee’s income, even if the employer’s offer of family coverage exceeds that threshold. This is known as the “family glitch” and prevents five million people from qualifying for federal subsidies to purchase coverage in the ACA exchanges.

New affordability test for family coverage: Following a January 2021 executive order, the IRS outlined a separate test for family members based on the cost of family coverage while the employee’s offer of affordable coverage will still be based on self-only coverage. Family members, defined as dependents or jointly filing spouses, would also be evaluated on whether they have an offer of affordable coverage from an employer. 

Concerns over data privacy? In order to determine affordability for family members, employers may be required to collect family income data from employees. However, the rule does not provide requirements on how this information is collected. Employers could have the employee attest to whether their family income is above or below the threshold, rather than collecting specific income information for family members. 

Proposed rule does not appear to affect ACA employer liability: Since employees would still be ineligible for subsidies if their employer offers affordable self-only coverage, ACA penalties would not apply, even if the family coverage is deemed unaffordable. However, it is not clear how the Biden administration will update the ACA exchanges to prevent employees who are not eligible for subsidies from mistakenly seeking coverage in the exchanges and receiving a subsidy.

Impact on employer market? Employers could see effects of this rule change if currently enrolled family members shift to plans in the marketplace.  Rep. Virginia Foxx (R-NC) says the rule chips away at employer-sponsored insurance as it will “weaken the firewall between the ACA and employer-sponsored insurance, placing more individuals on government-controlled health insurance.” The IRS expects the rule change could shift one million Americans from employer plans to ACA exchange plans. Its impact, however, will depend on whether families choose to stay on one health plan rather than opt to seek coverage from the exchanges.

Outlook: If the rule is finalized, family members who are not offered affordable family coverage (i.e., plan exceeds 10% of a household’s total income), will render the nonemployee family members eligible for subsidies during the next open enrollment period in 2023. HR Policy will be providing comments on the rulemaking, due June 6.