Final rule on affordability of family health coverage and health insurance premium tax credit

Employees’ family members who are eligible to enroll in the employees’ group health plan will be ineligible for federal subsidies under the exchanges if the employees are offered affordable self-only healthcare coverage, according to the final rule published on February 1 by the Internal Revenue Service (IRS). The final rule retains the provision in the IRS’s proposed rule basing the affordability test of the Patient Protection and Affordable Care Act (PPACA) on the cost of self-only coverage, rather than family coverage. Thus, an employee’s contribution toward the premium for family coverage is not taken into account when determining whether an employer is subject to penalties for not offering affordable coverage that satisfies PPACA’s minimum value standard. The IRS’s final rule may result in limiting federal healthcare premium subsidies for employees’ family members who purchase insurance from the exchanges beginning in 2014.

Under PPACA, employees eligible for an employer-sponsored health plan that is deemed “not affordable” can opt out of the coverage and receive a federal subsidy to help them purchase insurance in the exchanges. They are eligible for a federal health insurance premium tax credit, which is based on income as a percentage of the federal poverty level (FPL), if their employer-sponsored plan is deemed “not affordable,” i.e., if their share of the premium is more than 9.5% of household income. In addition, PPACA subjects employers to a $3,000 penalty for each full-time employee whose premium share exceeds the threshold of 9.5% of household income and who receives the subsidy to purchase exchange coverage.

In a related proposed rule also published February 1, the IRS said that family members of an employee who is offered affordable, self-only coverage will not be subject to the PPACA individual mandate penalty, which is applicable to individuals who do not obtain insurance if the employee’s premium share for family coverage exceeds 8% of household income and family members do not enroll in the coverage. This proposed rule cannot be relied upon at this time.

Employers should review their employee contribution and eligibility strategy for all employees to avoid unnecessarily limiting premium tax credit options under the exchanges for employees and their dependents.

For more information about the final rule or for assistance with implementing PPACA’s requirements, please contact your Milliman consultant.

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