BEYOND THE NUMBERS
More Families Will Spend Less on Health Care Premiums Thanks to a Fix for the “Family Glitch”
November 1, 2022: This post has been updated.
Just in time for open enrollment, the federal government finalized a rule, effective December 12, 2022, that fixes the “family glitch” ― a policy that barred millions of workers’ family members from receiving subsidized health insurance through the Affordable Care Act (ACA) marketplace. Due to this change, millions of people could be newly eligible to buy ACA coverage and receive financial help with premiums and deductibles. Nearly half of those newly eligible are families of low-income workers (those earning between 100-250 percent of the federal poverty level, or between $28,000-$70,000 a year for a family of four).
The new rule will expand access to affordable coverage for workers’ families by using the premium for family coverage ― rather than employee-only coverage ― to determine family members’ eligibility for premium tax credits (PTCs). If a person does not have any offer of employer insurance that meets standards for affordability and adequacy ― whether it is through their own employer or through the employer of a household member ― that person may now be eligible for PTCs to purchase coverage through the marketplace.
The family glitch resulted from the Internal Revenue Service’s 2013 interpretation of the ACA’s “firewall” provision. According to the ACA, a person cannot receive PTCs to purchase marketplace coverage if they have an offer of employer-sponsored insurance that meets certain adequacy and affordability standards. An employer plan is considered “affordable” if the employee’s premium contribution is less than 9.5 percent of their household income, adjusted for inflation (9.12 percent in 2023).
The IRS previously interpreted the ACA’s firewall provision to mean that if a person had an offer of adequate, affordable, employee-only coverage through their employer, their spouse and dependents were unable to receive PTCs to purchase a marketplace plan. This was the case even if the family coverage offered by the employer did not meet the ACA’s affordability standards, forcing families to choose between going uninsured or using a large portion of their income to pay for employer-sponsored coverage.
Most of the approximately 5 million people who fell into the family glitch chose the latter option, purchasing employer-sponsored coverage and paying much more than families with similar incomes, who did not fall into the family glitch (they were eligible for PTCs because their working family members did not have an offer of affordable, adequate, self-only coverage from an employer). One study estimated that people in the family glitch spend nearly 16 percent of their household income on employer-sponsored insurance premiums; low-income families in the family glitch pay an average of 22.5 percent of their income on employer-sponsored health coverage. In contrast, premium contributions for marketplace plans are capped at 8.5 percent of household income.
Not everyone who is newly eligible for PTCs is expected to enroll in marketplace coverage. The final rule estimates that about 1 million more people will receive PTCs over the next ten years due to this change. A separate analysis predicts that around 20 percent of new PTC recipients will gain insurance, while most will see lower premiums after switching from employer-sponsored coverage. This change is not anticipated to have a significant impact on the employer-sponsored insurance market but will lead to meaningful savings for families.
Due to the extension of PTC subsidies in the Inflation Reduction Act, many of these families will be newly eligible for plans with zero-dollar premiums, creating significant household savings just as costs for other essentials are rising. Families of low-paid workers, small business employees, workers in the service industry, and children under age 18 are expected to benefit most.
Those impacted by the family glitch will have important new options to consider when open enrollment for 2023 marketplace plans begins on November 1. Families who have been spending a large proportion of their income on employer coverage and are now eligible for PTCs, will need to compare premium savings and other features of marketplace plans. And the “firewall” remains in place, meaning that even if family members qualify for PTCs, if an employer offers affordable, adequate self-only coverage to the employee, the worker will not qualify. In such situations, the family would need to consider whether the savings from enrolling in marketplace coverage would offset the potential costs of paying two monthly premiums and having two separate deductibles and out-of-pocket maximums. Marketplace navigators and other consumer assisters can help families understand these trade-offs.