Health Reform Bulletin 166 – Cafeteria Plan Impact

On October 13, 2022, the IRS issued regulations fixing the so-called family glitch. The family glitch relates to access to premium assistance for purchase of health coverage through the marketplace. As a reminder, an individual is entitled to premium assistance to help offset the cost of purchasing coverage through the marketplace if certain criteria are met. See below for a temporary expansion of availability of premium assistance.

Under current law, a family who is otherwise eligible for premium assistance is disqualified from that assistance if even one family member has access to adequate, affordable employer provided health coverage. To be affordable, the cost of single coverage cannot cost the employee more than 9.5%, indexed (9.12% for 2023), of the household income. What this means is that if the employee’s cost of single coverage falls below this threshold, the entire family is denied access to premium assistance. Under the new regulation, which takes effect January 1, 2023, family members will not be denied access to premium assistance if the cost of family coverage is unaffordable, i.e., costs more than 9.12% of household income for 2023.>

The final regulations provide a minimum value rule for related individuals that is separate from the minimum value rule for employees, and that requires a plan’s share of the total allowed costs of benefits provided to related individuals to be at least 60 percent>

An employer plan that provides minimum value to an employee also provides minimum value to related individuals if the scope of benefits and cost sharing (including deductibles, co-payments, coinsurance, and out-of-pocket maximums) under the plan are the same for employees and family members.

Generally, this will not impact the employer significantly. Importantly, the regulations make it clear that the employer’s risk of an IRC §4980H(a) or (b) penalty does not change. Put another way, the employer will satisfy its obligation as long as the cost does not exceed the relevant threshold (9.12% for 2023) for single coverage.

Cafeteria Plan Impact

One area where the employer might experience some impact relates to family members wanting to drop off the employer plan. If the employee participates in an IRC § 125 Cafeteria Plan, this would create a challenge. As a reminder, cafeteria plan elections are binding for 12 months unless there is a permissible status change event.

Guidance issued in the form of IRS Notice 2022-41offers an option that allows a cafeteria plan to be amended to add, as a permissible status change, event coverage for family members through the Marketplace. If a cafeteria plan is amended to allow this status change event, an employee could change his or her premium election mid-year at such time as family members become covered through the Marketplace. Notably, this change does not allow a change to health FSA.

Cafeteria Plans are not obligated to add this status change event, however, if a plan chooses to allow it, the plan must be amended to permit employees to make a mid-year election change.

This guidance is effective for elections effective on or after January 1, 2023. If an employer chooses to allow this status change event, the plan must be amended to allow it. For the 2023 plan year, the employer has until the end of the 2024 plan year to accomplish the amendment as long as the plan is operated in accordance with the change. In subsequent plan years, the plan must be amended by the end of the plan year to which the amendment applies. Importantly, in no instance may an individual’s election change be retroactive. Again, the plan must be operated in accordance with the amendment.

Inflation Reduction Act (IRA) Temporarily Extends Premium Assistance

As a reminder, the IRA further extends a temporary expansion of premium assistance through a tax credit originally provided by the American Rescue Plan Act (hereinafter “ARPA”). An individual is entitled to premium assistance if the cost of coverage exceeds 8.5% of household earnings applicable to individuals, without regard to the 400% of poverty standards typically imposed for access to premium assistance. This extension applies through December 31, 2025. For further explanation, see Health Reform Bulletin 165. 

Updates: State-required Individual Mandate Reporting

The states of California, District of Columbia, Massachusetts, New Jersey, Rhode Island, and Vermont have enacted individual mandate laws that require residents to be covered by minimum essential coverage (MEC) or pay a state tax.  Further, certain states require entities who provide MEC to file information returns to the relevant state revenue departments.

Most of these states accept the Form 1094 and 1095 series used for federal MEC filing purposes. Recently, several state revenue departments have issued updates relating to these reporting obligations, as reflected in the charts below.

Notably, unlike many other employment laws, these state individual mandates are not based on place of employment; rather, the applicability of the state individual mandate laws is based on state of residence.

• Self-insured health plans, fully insured health plans covering min. 50 full-time employees, health insurers
• Third party service providers may file forms for applicable entities