Under Internal Revenue Code (Code) Section 36B, individuals are eligible for an exchange subsidy (or premium tax credit) if their employer has not offered them affordable coverage that provides minimum value. The IRS recently released two pieces of guidance with respect to eligibility determinations under Code Section 36B – Final Regulations under Code Section 36B and Notice 2022-41.  Under the new guidance, subsidized exchange coverage for family members will be based on the cost of employer-sponsored family coverage.  Plans that operate on a plan year other than the calendar year may be amended to permit mid-year election changes corresponding to the new exchange subsidy eligibility rules.

Final Regulations: Exchange Subsidy Eligibility Changes

An employee’s family member is not eligible for a subsidy for health insurance purchased on the exchange if, among other things, the individual has received an affordable offer of minimum value coverage under an employer’s group health plan. For this purpose, an offer of coverage will be considered affordable if the premium cost of family coverage under that plan does not exceed 9.12 percent (in 2023, adjusted each year) of household income. The coverage will be considered to provide minimum value if it has at least a 60 percent actuarial value based on the level of coverage offered to the family (and provides substantial coverage of inpatient hospital and physician services). The previous rules-based affordability and minimum value on the cost and level of benefits of self-only coverage rather than family coverage. These changes only apply to family members, not for employees; therefore, a spouse or dependent could have an offer of employer coverage that is unaffordable (thereby triggering eligibility for a subsidy) even though the employee has an affordable offer of self-only coverage.  These changes were made in Final Regulations issued on October 11, 2022 by the IRS and the Department of the Treasury and are effective January 1, 2023.

No Impact on Employer Shared Responsibility Penalties

The determination of whether the employee is eligible for an exchange subsidy will continue to be based on the cost and level of benefits of self-only coverage offered under the employer’s group health plan. Any potential employer shared responsibility payment is only triggered when a full-time employee (not a family member) receives an exchange subsidy. For that reason, the changes in the Final Regulations will not impact the determination of whether an employer has met its employer shared responsibility requirements and do not impact information required to be reported on Forms 1094-B, 1094-C, 1095-B or 1095-C.  Keep in mind that employers can take advantage of safe harbor affordability rules to minimize potential shared responsibility penalties; the new guidance does not change these safe harbor rules.

Notice 2022-41: New Related Cafeteria Plan Change Event

The IRS and the Department of the Treasury also issued Notice 2022-41, which, effective January 1, 2023, permits plan sponsors to allow participants to prospectively make a mid-year election out of a family coverage group health plan election (other than a healthcare flexible spending account) and into self-only coverage (or family coverage including one or more already-covered family members) in order to allow a family member to take advantage of an available subsidy and enroll in a qualified health plan on the exchange, provided specific conditions are met. Typically, an employee cannot make a mid-year change to healthcare coverage unless one of several “change in status” events have occurred (like marriage, a birth or loss of other coverage). Note, however, that this new guidance only applies to plans that operate on a plan year that is other than the calendar year. Plan sponsors that want to offer this option must amend their cafeteria plan on or before the last day of the plan year in which the election is allowed. The amendment can be retroactive to the first day of that plan year, provided the plan operates in accordance with the guidance in the Notice and informs participants of the amendment. For the plan year that begins in 2023, the plan sponsor may adopt the amendment at any time on or before the last day of the plan year that begins in 2024.