Congress Should Step Up to Fix Obamacare’s Family Glitch

On April 7, the Biden administration fulfilled a promise to extend health insurance coverage to family members of individuals offered expensive health insurance through an employer.

In a proposed rule, the IRS changed its interpretation of the Affordable Care Act (ACA) provision that family members of employed individuals cannot qualify for premium subsidies in the ACA’s individual insurance marketplace if the employee has an offering of affordable “self-only” coverage from his or her employer. This prevailing interpretation, in place since 2013, has become known by advocates as the “family glitch,” since it often prevents family members of employees from obtaining affordable coverage.

Under the administration’s proposed rule, spouse and dependent eligibility for premium subsidies in ACA marketplace plans will not be determined by the affordability of the employee’s share of self-only coverage. Instead, the eligibility will be determined by the affordability of the employee’s share of “family” coverage.

Many advocates seeking to expand coverage under the ACA welcomed the news of the proposed rule as a long-overdue change to making health insurance more affordable for families. The policy change will undoubtedly benefit hundreds of thousands of families, especially large ones with lower incomes. The White House estimates that 200,000 uninsured individuals will obtain coverage, while around one million will switch from employer-sponsored plans to more affordable individual market plans.

Despite the benefits of the policy and the administration’s confidence in its legality, the proposed rule comes with several potential problems.

Regulation is in the eye of the office holder

The IRS code states that an employee is not eligible for premium subsidies if the employee’s required contribution for employer-sponsored insurance is less than a certain percentage of the employee’s income. The code also states that the same test for subsidy eligibility “shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee.” (IRS Section 36B(c)(2)(C)(i)(II).) In defining a “required contribution,” the code cross-references the ACA’s individual mandate provisions, defining it as the employee share of premiums for self-only coverage. (IRS Section 5000A(e)(1)(B)(i), emphasis added.)

From this reading, it appears the same rule for family members should apply. That is, eligibility for family members is determined by the affordability of self-only coverage, rather than family coverage. This was the IRS’s original interpretation that has prevented millions from accessing premium subsidies in the ACA marketplace.

However, IRS Section 5000A has a separate “special rule” for the individual mandate that applies to family members of employees: “if an… individual is eligible for minimum essential coverage through an employer by reason of a relationship to an employee, the determination…shall be made by reference to the required contribution of the employee.” (IRS Section 5000A(e)(1)(C), emphasis added.)

Here, the IRS now interprets the “special rule” as modifying the requirement that the required contribution be defined by self-only coverage, and that “required contribution of the employee” refers to the contribution an employee would pay for family coverage.

It is worth noting that, despite Congress setting the individual mandate penalty to $0 in the Tax Cuts and Jobs Act of 2017, the IRS provisions relating to the individual mandate still exist and are incorporated into eligibility determinations for premium subsidies for families offered employer-sponsored coverage.

Supporters of the proposed rule say the IRS is simply choosing a second but equally valid interpretation of the law, citing the Supreme Court’s Chevron and Auer deferences that give federal agencies power to interpret their own regulations.

On the other hand, critics contend that the Biden administration’s new rule interpretation is wrong because the plain reading of the statute and regulations require the original interpretation to stand. In particular, opponents assert that the administration is conflating tax credit provisions (contained in IRS Section 36B) with the law’s individual mandate provisions (contained in IRS Section 5000A) to create a new eligibility standard that did not previously exist. They also cite circumstances of the ACA’s passage, including the Obama administration’s desire to limit the cost of the bill, further supporting the more limited understanding of the language. Indeed, President Obama insisted on the original legal interpretation through his second term, despite ample opportunity to change it in the face of constant pressure from advocacy groups.

It is therefore likely that if the proposed rule is finalized, the new interpretation will be challenged in court.

Unstable policymaking

The IRS began a review of the provisions surrounding the family glitch in response to the Biden administration’s executive order on January 28, 2021, directing the Treasury Secretary to review all regulations and agency actions so that they were consistent with strengthening the ACA. The order also directed the secretary to specifically review regulations relating to affordability of coverage, including for dependents.

The proposed rule would not exist if not for the executive order. While it is possible for either interpretation to be valid depending on how you read the statute, the IRS did not change it without pressure from the White House. Nevertheless, the debate on the provision’s interpretation will not end with a finalized rule.

Over the last few years, several legislative attempts to fix the family glitch have failed in Congress. It is therefore understandable that Biden used his executive power to interpret an ambiguous provision to extend more affordable coverage to families. If Biden’s approach to fixing the family glitch somehow withstands legal scrutiny, it nevertheless suffers from the same weakness as all policy changes initiated by executive order: they can be reversed by the next administration.

The family glitch would be more effectively solved through legislation. Clarifying the statute would prevent the seesaw changes of “legislation through regulation” that are commonplace in Washington today.

Rose-colored assumptions

Under the new rule, the Biden administration estimates that 200,000 uninsured individuals will obtain affordable coverage, while one million more will obtain more affordable coverage than they have now.

In contrast, the Urban Institute recently simulated the effects of removing the family glitch for spouses and dependents, a policy equivalent to Biden’s proposed rule. While the simulation estimates a similar number of uninsured obtaining affordable coverage, it only estimates just over 600,000 switching from their current plans to more affordable marketplace coverage — about 39 percent less than the Biden administration’s projections.

Regardless of how many obtain more affordable coverage, low-income families would benefit most. One study found 46 percent of dependents caught in the family glitch had household incomes below 250 percent of the federal poverty level, while 79 percent were below 400 percent — the threshold to qualify for premium tax credits absent the enhanced credits authorized under the American Rescue Plan.

Naturally, the federal budget cost of the fix depends on assumptions made about the number of people who will take advantage of the policy change. Depending on income, family size, and health insurance options both from employers and in the individual marketplace, some families caught in the glitch will benefit from the rule change while others will benefit more by remaining in employer-based plans. Part of the increase in subsidies from family members moving to marketplace coverage will also be offset by a decrease in the tax exclusion for employees’ share of premiums on employer-sponsored plans.

The cost estimates of the proposed rule affecting only family members vary widely. The Urban Institute estimated a cost of $2.6 billion annually, while the Congressional Budget Office scored a similar legislative proposal in 2020 that estimated $45 billion over 10 years, or $4.5 billion per year. And since the proposed rule bypasses Congress through the regulatory process, there’s no plan on how to pay for it.

Exposing the flaws in a highly regressive system

The proposed rule addresses the family glitch by considering the employee’s share of costs for family coverage to determine whether the employee’s family members qualify for marketplace subsidies. However, subsidy eligibility for the employee will still depend on the employee’s share of self-only coverage.

As a result, many families could end up having two separate insurance plans with different provider networks, deductibles, co-pays, and out-of-pocket maximums. In many cases, paying two separate insurance premiums will exceed any cost savings from premium tax credits used to purchase family coverage in the ACA marketplace. The Biden administration has accounted for these factors, noting that many of the more than five million individuals caught in the family glitch will nonetheless forgo coverage in the ACA marketplace for this reason.

The proposed rule’s omission of employees from the broader interpretation of family premium costs is not an accident. Under the current statute, employers with 50 or more employees are subject to the employer mandate penalty if they fail to provide affordable coverage to employees only. Thus, the proposed rule sidesteps the employer mandate issue by addressing only affordability of coverage for family members.

At the same time, employers are concerned that risk pools for employer-sponsored insurance will get sicker as younger and healthier family members leave for ACA plans.

Proposed rule hits employers: As written, the proposed rule to fix the family glitch would overwhelmingly benefit healthy spouses and dependents of employees enrolled in employer-sponsored health insurance. As these individuals choose ACA marketplace plans with premium assistance, small-group plans will see their insurance pools get sicker. Note: The Kaiser Family Foundation analysis assumes the enhanced premium tax credits under the American Rescue Plan Act will continue, including credits for those whose household income is 400%-600% of the federal poverty level. If the enhanced premium tax credits expire, the number of individuals in the family glitch will be reduced by 1.1 million.

In a wider sense, addressing the family glitch through regulatory action hastens the fragmentation of the health care system and underscores the poor distribution of health insurance subsidies in the United States.

For example, the tax exclusion for employer-sponsored health insurance subsidizes coverage for the wealthy who pay higher income tax rates. In addition, Medicare generously subsidizes health care for wealthy individuals with the greatest ability to pay on their own.

At the other end of the economic spectrum, many working families are excluded from affordable health insurance options because of the family glitch. Often, employers offer only one health plan option that features ever-increasing premiums, deductibles, and out-of-pocket maximums. Without more affordable options, the result of the nation’s regressive insurance subsidy scheme is predictable. Since 2018, the average American family pays a greater share of household income on hospital care alone than federal taxes.

A real fix must come from Congress

In helping some families now, Biden’s regulatory fix amplifies the larger problem of America’s misdirected system of health insurance subsidies. Though ACA subsidies are imperfectly designed, a legislative fix that includes both the employee and his or her family members would move in the right direction by allowing more Americans to gain access to affordable health insurance coverage as complete household units.

The Fair Care Act of 2020, sponsored by Rep. Bruce Westerman (R-Ark.), addresses the family glitch by allowing employees and families to choose between an employer plan or a subsidized marketplace plan without restriction. Importantly, the Fair Care Act’s provisions to address the family glitch would more than double the number of individuals obtaining more affordable coverage and reduce the number of uninsured compared to Biden’s proposed rule. This comprehensive fix would be fully funded. In fact, the bill would reduce the deficit by more than $150 billion over 10 years by reforming insurance markets, empowering patients, and reducing underlying health care costs.

Biden’s proposed fix to the family glitch may work in the short term, but lawmaking through executive order and regulatory interpretation is vulnerable to legal challenges and policy reversals in subsequent administrations. A legislative fix would permanently increase the number of insured in a fiscally sustainable way, while also providing needed assistance to millions of the under-insured struggling to make ends meet.