When Should Uninsured Family Members of Employees with Access to Affordable Self-Only Employer Coverage Qualify for Premium Tax Credits?
Posted on October 3, 2012 | No Comments
This Implementation Brief on premium tax credits examines the question of how the Affordable Care Act (ACA or the Act) addresses the problem that arises when low- and moderate-income employees have affordable “self-only” employer coverage, but face prohibitively high costs for family coverage, well beyond levels considered “affordable” under the Act. (We have previously written about ACA premium tax credits here.) Coverage for a full family is extremely expensive: according to the Kaiser Family Foundation, the average 2012 cost of family coverage approaches $16,000, placing unsubsidized family benefits beyond the reach of all but affluent families. Kaiser further reports that while the average worker contribution for self-only coverage is about $950 annually, the required contribution for family coverage on average exceeds $4,300.
The Internal Revenue Service is charged with implementing the Act’s premium tax credit provisions and will have to answer the question of when should uninsured family members of employees with access to affordable self-only employer coverage qualify for premium tax credits. How the agency ultimately answers this question requires consideration of three separate provisions of the Act: (1) the Act’s personal responsibility provisions, which require most individuals with access to affordable coverage to secure coverage or pay a tax penalty; (2) the Act’s conditions of eligibility for premium tax credits through state health insurance Exchanges; and (3) the Act’s employer responsibility provisions.
The ACA seeks to assure that nearly all individuals have access to affordable insurance coverage and maintain that coverage. Non-exempted individuals must secure affordable “minimum essential coverage” for themselves and their dependents or else to make a “shared responsibility” payment. Where individuals have access to employer-sponsored coverage, a contribution is required if affordable; however, the Act defines the term “required contribution” only as “the portion of the annual premium which would be paid by the individual . . . for self-only coverage.” Thus, if family premiums remain unaffordable within the meaning of the Act, a contribution is not required.
Eligibility for premium assistance
The next question is whether low- and moderate-income employees with access to affordable self-only coverage can qualify for premium tax credits for their uninsured family members. This question can arise in two contexts: first, where an employer offers no family coverage; and second, where the employer offers family coverage but with either limited or no premium contribution, so that the cost of the plan exceeds the law’s affordability threshold.
Under the Act, premium assistance through tax credits is available for the purchase of family coverage from qualified health plans sold through state health insurance exchanges. In order to qualify for tax credits, individuals must not otherwise be “eligible for minimum essential coverage” and must have annual incomes that fall below the Act’s upper threshold of 400 percent of the federal poverty level. The Act explicitly addresses how the premium tax credit works in the case of workers at firms that offer employer-sponsored coverage. The law specifies that in order to secure assistance, the “employee or family must not be covered under [an] employer plan”; it further provides that premium assistance is available in the case of workers whose employers offer health plans if the “required contribution to the plan exceeds 9.5 percent” of household income; furthermore, the law extends eligibility for assistance, using this affordability test, to dependents – i.e., to individuals “whose eligibility to enroll in the plan” arises from their relationship to the employee. The ACA thus specifies that premium assistance is available when the cost of an employer plan – for an individual or for a family — exceeds 9.5 percent.
A third question concerns the obligations of employers. The Act establishes certain responsibilities on larger employers. Penalties are imposed on “any applicable large employer” that “fails to offer to its full-time employees and their dependents” the opportunity to enroll in a health plan. However, assessments are applied and calculated only in relation to employees who seek premium assistance for their own coverage and are capped at rates per employee that fall well below the cost of family coverage.
How the IRS interpreted the individual and employer responsibility sections
In final regulations issued in May 2012, the Internal Revenue Service interpreted the Act as making premium assistance available to low- and moderate-income uninsured family members of insured workers only in cases in which the employer contribution is so low that the employee’s responsibility for self-only coverage would surpass the 9.5 percent threshold. Thus, where an employer offers affordable coverage to the worker but not to the family members, the IRS rule would bar the family from receiving premium assistance.
Debate over the IRS Interpretation
The IRS rule has spawned a debate over the meaning of the law, with respect to both the obligations of employers and the rights of families. Employers have argued that despite the allusion in the Act to the offering of family coverage, they in fact have no duty to offer such coverage and should not face penalties for their failure to offer coverage.
Family advocacy organizations have argued that the IRS interpretive rule will leave millions of children and spouses without affordable employer coverage while at the same time barred from gaining access to affordable coverage through their state exchange. They also point out that to define affordability only on the basis of self-only coverage could lead employers to stop offering affordable family coverage all together, since no employer penalties would attach to unaffordable family coverage. The Government Accountability Office (GAO) has estimated that the IRS interpretation of when employer coverage is not affordable for families could leave approximately 6.6 percent of children uninsured, since they would be ineligible for premium assistance even in situations in which employer-sponsored family coverage is unaffordable.
One coverage option for children in such families would be the Children’s Health Insurance Program (CHIP), which is designed to assist low- and moderate-income families. However, CHIP is not funded after 2015; the GAO concludes that states may eliminate CHIP programs or reduce eligibility, a development that in turn would produce an additional 1.9 million children that would be ineligible for premium tax credits under the IRS’s affordability standard.
Options for Resolution
The IRS has indicated that it is still considering how to address this issue.
One option is to retain the IRS ruling, which would have the effect of excluding uninsured family members from premium assistance in situations in which an employer offers family coverage but makes coverage affordable within the meaning of the law only for self-only coverage for workers. This approach shields the premium assistance program from uninsured family members and emphasizes the importance of affordable family coverage, by not effectively creating an incentive to offer only unaffordable family coverage. Families that cannot afford their employer plans would be able to enroll eligible children in CHIP at least through Fiscal Year 2015. The disadvantage of this approach is that it leaves families exposed after FY 2015 or earlier in states that elect to end CHIP sooner. Furthermore, since CHIP is not a source of assistance for uninsured spouses, this solution would not provide a source of assistance for spouses. In the case of very poor family members of workers, Medicaid might be a possibility, but the future rate of Medicaid expansion remains a question in the wake of NFIB v Sebelius. Furthermore, the Congressional Budget Office has estimated that in 2022 about 33 percent (around 2 million) of the people who would have been newly eligible under the ACA’s Medicaid expansion prior to the Supreme Court’s decision would actually have incomes high enough to qualify for Exchange coverage if states are permitted to apply an income threshold for Exchange eligibility of 100 percent of the federal poverty level.
A second option would be to adopt an interpretation of the ACA that attempts to reconcile its ambiguous terms by permitting uninsured family members to secure premium tax assistance even when a worker has access to affordable employer-sponsored self-only coverage. This interpretation would appear to be consistent with several key provisions of the Act. First, the law imposes a personal responsibility on adults to insure their children if affordable coverage is available. Second, the Act establishes exchanges with premium credits in order to make coverage affordable and extends tax credits to family members separate and apart from workers, thereby suggesting that the law contemplates split financing arrangements where the worker has access to affordable coverage but the family does not. Third, although the Act require employers to pay a penalty when they fail to offer an opportunity for employees and their dependents to enroll in a plan, it defines affordability only in relation to self-only coverage; indeed, under the Act, the employer penalty is low enough to reflect only the value of self-only coverage, not the far higher value that would attach to family coverage.
This alternative approach effectively permits tax subsidies in situations in which family coverage offered by employers remains unaffordable. However, the average 2012 employer contribution to family coverage is already well below the proportional contribution for self-only coverage, suggesting that the problem of low employer contributions for family coverage is one that pre-dated the Act. Furthermore, since nothing in the Act requires employers to offer any coverage (individual or family), and since the penalty is capped at an individual premium value, this result appears to be consistent with the employer flexibility policy that guides the Act.
A final IRS decision on this issue is expected by the end of the year.
 Kaiser Family Foundation, Employer Health Benefits, 2012 Summary of Findings http://ehbs.kff.org/pdf/2012/8346.pdf (Accessed online September 24, 2012).
 Id. Section 6.
 The legislation contains religious exemptions as well as exemptions for persons not lawfully present in the U.S. and incarcerated persons. Internal Rev. Code §5000A(d).
 The Act provides for religious and incarceration exemptions. Internal Revenue Code §5000A.
 The term “minimum essential coverage” means Medicare, Medicaid, CHIP, TRICARE, veterans health, Peace Corps coverage, employer sponsored health plans, grandfathered plans, plans sold in the individual market, and other plans recognized by the Secretary.
 Internal Rev. Code §5000A(a).
 Internal Rev. Code §5000A(b).
 Internal Rev. Code §5000A(e)(1)(B)(i).
 Internal Rev. Code §36B(b)(2)(A).
 Internal Rev. Code §36B(c)(2)(B).
 Internal Rev. Code §36B(b)(3)(A).
 Internal Rev. Code §36B(c)(2)(C)(iii).
 Internal Rev. Code §5000A(c)(2)(C) (ii)(I).
 Internal Rev. Code §36B(c)(2)(C).
 Internal Rev. Code §36B(c)(2)(C)(i)(II).
 Internal Rev. Code §4980H(a) and (b)(1).
 Internal Revenue Code § 4980H (b). The assessment is calculated under a special formula laid out in the statute and is capped at $3000.
 77 Fed. Reg. 30377-30400 (May 23, 2012).
 26 C.F.R. § 1.36B-2(c)(3)(v)(A)(i).
 The ERISA Industry Committee (ERIC) letter to Jeanne Lambrew, Deputy Assistant to the President for Health Policy. August 27, 2012. Available at: http://www.eric.org/uploads/doc/health/ERIC_Letter_SharedResponsibilityDependentCoverage_082712.PDF.
 First Focus letter to the Honorable Timothy Geithner, Internal Revenue Service (October 31, 2011).
 U.S. GAO, Children’s Health Insurance: Opportunities Exist for Improved Access to Affordable Insurance. GAO-12-648 (June 2012). Available at: http://www.gao.gov/assets/600/591797.pdf.
 Id. at p. 15.
 Congressional Budget Office, Estimates for the Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision (July 2012). Available at: http://cbo.gov/sites/default/files/cbofiles/attachments/43472-07-24-2012-CoverageEstimates.pdf.