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The IRS Addresses “The Family Glitch”: What You Need to Know

Applicable large employers (ALEs) must offer essential health care coverage to full time employees. Under the Affordable Care Act (ACA), this applies to their dependents as well. A penalty may be imposed on an ALE if one full time employee receives a premium tax creditfrom buying coverage through a Health Insurance Market Place. Also commonly known as an ‘exchange.’

Regulations that change eligibility standards for the premium tax credit have recently been changed by the IRS. Starting in 2023, employer sponsored coverage pricing for family members will be based on the employee’s family coverage costs. This is instead of the cost of just the employees cost of coverage. The IRS took this step to fix what was referred to as “the family glitch.”

The IRS also issued related guidance allowing participants in only non–calendar-year cafeteria plans to revoke their elections for family health coverage midyear to allow one or more family members to enroll in a qualified health plan (QHP) through a Health Insurance Marketplace. This guidance has been revised.

Conditions Must Be Satisfied
According to the revised guidance, any  plan — regardless of plan year — can be amended to allow prospective midyear election changes from family coverage to employee-only coverage under a group health plan that’s not a health flexible spending account and provides minimum essential coverage. However, the following two conditions must be met:

  1. One or more related individuals are eligible for a special enrollment period to enroll in a QHP through a Health Insurance Marketplace, or one or more already-covered related individuals seek to enroll in a QHP during the Marketplace’s annual open enrollment period, and
  2. The election change corresponds to the intended QHP enrollment for new coverage effective beginning no later than the day immediately following the last day of the revoked coverage.

Plans may rely on an employee’s reasonable representation regarding enrollment or intended enrollment in a QHP. The guidance applies to elections that are effective on or after January 1, 2023.

Amendments must be adopted on or before the last day of the plan year in which the changes are allowed. An amendment may be effective retroactively to the first day of that plan year if the plan operates in accordance with the guidance and participants are informed of the amendment. However, amendments for a plan year beginning in 2023 can be adopted on or before the last day of the plan year beginning in 2024.

Flexibility Granted
The new family-member enrollment event is optional, but employers that sponsor calendar-year cafeteria plans have been granted the flexibility to offer it under their plans. Although plan amendments may be adopted retroactively as provided in the guidance, election changes to revoke coverage retroactively aren’t permitted. We can help you manage the tax and information-reporting complexities of offering health care coverage. Contact your KPM advisor today!

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