The IRS has announced a change in the rules regarding eligibility of taxpayers for a premium tax credit undersection 36B of the Affordable Care Act. Under the ACA, if a large employer fails to offer an employee and his family affordable coverage providing minimum value and the employee enrolls in a qualified health plan through an Exchange, the employee may be eligible for a premium tax credit. Prior guidance from the IRS provided that family coverage was affordable if the amount the employee had to pay for self-only coverage did not exceed 9.5% of household income, regardless of how much the employee had to pay for family coverage. The revised rule provides that a plan would be treated as affordable for an employee’s spouse and children if the portion of the annual premium the employee must pay for family coverage does not exceed 9.5 percent of household income.
As a result of this new rule, some family members may wish to drop coverage under an employer’s plan and obtain coverage through the Exchange. If the employee paid for this coverage through a Section 125 Cafeteria Plan, the employee would have to make an election change. Under existing IRS rules, that change would not be permitted outside of the Cafeteria Plan’s open enrollment period. This would be problematic in the case a non-calendar year Cafeteria Plan (e.g., a plan that did not coordinate its open enrollment with the open enrollment period on the Exchanges). In order to avoid that problem, the IRS has created a new rule for cafeteria plan election changes.
Specifically, a noncalendar year cafeteria plan may allow an employee to revoke prospectively an election of family coverage under a group health plan that is not a health FSA and that provides minimum essential coverage provided the following conditions are satisfied:
- One or more related individuals are eligible for a special enrollment period to enroll in a QHP through an Exchange, or one or more already-covered related individuals seeks to enroll in a QHP during the Exchange’s annual open enrollment period; and
- The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the related individual in a QHP through an Exchange for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked. The employer may rely on an employee representation that this has or will occur.
A related individual is a person who is eligible for coverage under an employer-sponsored plan because of a relationship to an employee and for whom a personal exemption deduction is claimed on the employee’s Federal income tax return.
This rule change is not automatic nor is a plan required to adopt it. If plan does wish to adopt it, the employer must amend the plan by the last day of the plan year in which the election change is first allowed and notify participants of the amendment.
This rule change is effective for elections made on or after January 1, 2023.