Intro
When the Affordable Care Act was passed into law in 2010, there were lofty promises of a world with affordable options for ALL people.
For Applicable Large Employers (ALEs), ACA has come with additional compliance, scrutiny, reporting, and oversight. Plans must check so many boxes to be considered Qualified, and every day new requirements are added. Most recently this includes Machine Readable Files, Mental Health Parity requirements, and RxDC reporting. All of the direct costs of administering the plan and covering the medical claims of your employees are added above and beyond these intangible costs.
For Small Employers with two to 49 employees, the question has become “what do we offer?” and “How do we compete in such a competitive job market?” For small groups, the trend over the past few years, in our experience, has been ever-rising costs for the same coverage. This causes employees to either pay more, opt for less coverage (higher deductibles), get creative with programs like ICHRA and QSEHRA, or drop out of benefits altogether, and just bump up salaries.
Whether an employer is small, or an ALE, the tone from both sides is the same… How can we curb costs AND maintain or improve what is offered to employees? Different members of the executive team view this dual mandate through different lenses, but the underlying goals are the same.
The Employee Experience
Before we get into answering those questions, and how this new rule impacts businesses and employees, we want to give some perspective to both sides of the coin.
For employees, the Affordable Care Act has caused single people and families to see higher and higher annual rates. As you can see below, the average monthly cost for a family of four was $465.66 in 2020. This has continued to climb over the years, and while this was the average, some employers chose to cover all plan premiums and others covered the employees’ premiums but not their spouses, resulting in some families paying over $1,000+ per month.
Source: kff.org
The Employers Affordability
Under the Affordable Care Act, one of the many tests your plan must undergo is the affordability test.
Your safe harbor for affordability is to determine if the employee-only rate is under the, 9.5 percent (as adjusted) affordability threshold. Starting in 2023, the updated threshold is 9.12 percent. Assuming you have met the safe harbor, there is no requirement to subsidize the family premiums for the spouses and/or dependents covered by your plan. This fact is often why employees see a much higher contribution to insure their family than they have when they are covering themself.
The IRS Final Rule is designed to offer both Employees and Employers relief on the overall cost of the plan.
Analysis Of The New IRS Rule
On October 11th, the IRS issued “Affordability of Employer Coverage for Family Members of Employees” that patches the “family glitch”. (Click here to review the federal register)
// FAQ’s
For Employers, this guidance DOES NOT impact your reporting or add additional burdens to your workflows. To answer a few questions we frequently receive:
- Section 4980H safe harbors are based on the employee-only rate, which are still in place beyond the IRS final rule.
- 1095-B and 1095-C reporting requires you to report an offer of coverage to employees and their dependents to enroll in minimum essential coverage. Offering coverage is your burden, accepting coverage for dependents is a choice households are allowed to make.
- Section 125 Cafeteria plans that do not run on a calendar year basis were considered in this rule-making. IRS Notice 2022-41 provides specific guidance that allows spouses and dependents to request a mid-plan year disenrollment for a January 1st, 2023 effective date under group plans other than Flexible Spending Arrangements(FSA’s) within a Section 125 plan. For instance, if Section 125 runs from July to June, the family would be able to request early termination of coverage for non-employee insureds as of 1/1/2023. It is encouraged that non-employee family members have other qualified health insurance for a 1/1/2023 effective date to avoid any gap in coverage. That said, the burden on the plan is to process the disenrollment pursuant to the notice.
// WHO THIS BENEFITS
In the past, under Section 36B of the Affordable Care Act, families have been ineligible for subsidies IF the employee has access to affordable coverage. The Final Rule adds an additional affordability test for families to use to split spouses and dependents off of the employer plan.
For example, assume an employee would have access to a plan for $125 per month for themself, $600 for spouse, and $1,125 for the whole family. Additionally, they have a household income of $90,000.
For the employee-only plan, they would qualify for affordable employer coverage.
The second test would consider the example household rate of $1,125 per month against the same household income of $90,000. The ratio, in this case, is 15% of the household income, so the spouse and dependents can prove the plan is unaffordable for them and would be able to enroll in a plan through the affordable care act.
At $90,000, the affordable care act plans, for this household, range from $326.47 for a bronze plan with a higher deductible to $646.23 for a gold plan with $0 deductible and $20 copays for physician appointments and full drug coverage.
With this Final Rule, if we assume the employee takes the $125 per month from work, and his family selects $357.51 per month for capital blue, they have a household cost of $482.51 per month. This puts over $600 of take-home payback in their pockets. At an annual level, this works out to $7,200 saved which would cover the costs of even the highest deductible plans.
The bottom line is, because of the new IRS rule, individuals and families now have choices.
The reality is that while this is great for families, there is also an inherent benefit to employers as well. For ALEs, the employer's burden is to offer spouses and dependents quality coverage. Depending on the makeup of your employee population, you may find that over-promising to offer AFFORDABLE coverage to spouses and dependents may be a cost that is already earmarked by the IRS and Department of Health, but you are paying for it.
There are many factors in shifting this risk to the individual market, like if the market plans are equivalent to what you offer. For instance, in Pennsylvania, where our firm is based, many counties have 50, 75, or even 100 plans available to families to choose from. In rural parts of the south and midwest, we have experienced areas where two carriers offer closer to 10 - 15 plans with limited networks and more restrictions.
If you are in an area that has a large number of choices, and that family is able to recapture hundreds of dollars per month, then you have fewer participants you are paying for and managing on your plan. Additionally, for employers that cover 50% or more of the cost of dependents, shifting to an unaffordable dependent model allows rank-and-file employees to access the individual market, and allows your benefits budget to be freed up.
Earlier we talked about how to curb costs and maintain or improve your offerings. Having freed up cash flow allows you to upcycle your savings into other programs like Retirement Plans, Dependent Care, Tuition Reimbursement, or better plans for the individuals who show up every day to keep your business thriving. Naturally, for their spouse and dependents, having the ability to cut the cost of covering all of their family members and having more take-home pay helps too.
Implementation, Your Advisor Lineup
In order to consider utilizing this IRS Final Rule to the fullest, it is best to add a new face to your outside council of advisors: the Individual Health Broker.
The individual markets can be nuanced (consider my example above of whether there are enough options). Additionally, for spouses and dependents to be eligible for a marketplace plan, they must demonstrate unaffordability. This adds a new domain of interpreting HOUSEHOLD income (your payroll team has compliance limitations to households). While CPAs and Financial Advisors will claim income as their domain, the crossover between income and the individual health insurance market and income thresholds for different programs requires an Individual Health Insurance broker. Where Employee Benefits Brokers split their time between group plan designs and consulting on compliance and oversight, the Individual Health Insurance Broker splits their time between individual plan designs and income planning.
For Employees
Send employees to this article.
Once they determine they are eligible for the markets, they can use mysnaphealth.com to compare coverage options. This system is accessible 24 hours a day and uses a proprietary algorithm to account for your doctors, prescriptions, and income to sift all plans available in your area and make three personalized recommendations based on your specific needs.
If SnapHealth is not yet available in their area, employees have other choices for who helps them with health insurance. If you want someone local to your area, consider finding a specialist at NAHU.org or HAFAmerica.org. Additionally, our team works with businesses around the US and would be happy to help. There are also options such as Healthcare.gov and state-based exchanges, however, these representatives are not licensed, can not provide guidance on income questions, cannot recommend what a person should do and, from our experience, are glorified order takers.
Takeaway: Employees can now split their coverage to save money. This is a win-win for individuals and businesses alike.
Because of a new IRS rule, families can now choose between insuring spouses and dependents through the available employer plan, or if it would save them money to split. The employee would maintain coverage through work and the spouse and dependents would look for an individual plan that is more cost-effective.
By doing this split, families can stand to save hundreds of dollars per month that can be used for other personal needs and help them save money over the long haul.
This update was so momentous that the IRS fast-tracked eligibility to families starting November 1st.
As an employer, consider the unique makeup of your plan. Each new regulation, rule, or legislation is either an opportunity or an obstacle. We see opportunities for plan sponsors to curb costs of their health plans while maintaining the quality of life for their employees and dependents. This is a win-win.
About the Author: Joshua Brooker is a Legislative Policy Analyst who specializes in the Individual Health Insurance Markets. He has been quoted in the WSJ, Kaiser Health News, Insurance News Net, and authored 5.1 Million Are Impacted By The Family Glitch: How Is The IRS Taking Steps To Fix It? Published in American Benefits Specialist for the National Association of Health Underwriters. He’s an advocate for a better US Health System by working with clients, the government, industry groups, and the press.
About SnapHealth: Joshua Brooker spent 10 years with his team helping individuals with the Affordable Care Act Individual Market. Due to their model of service, and a focus on helping families, his team hit an apex in the volume of families they could actively help. They built SnapHealth as a self-guided resource for individuals and families to independently receive guidance on their terms. In the future, SnapHealth will add tools to help consumers navigate the out-of-pocket costs connected to their medical needs, too.