The ACA's Family Glitch and the Proposed Solution

For people who don't have access to employer-sponsored insurance, the Affordable Care Act (ACA) includes subsidies to make health insurance affordable. But not everyone fits neatly into one of those two categories. Some people have access to an employer-sponsored plan, but can't afford the premiums. For some of them, the ACA provides relief. But for about five million Americans in this situation, there's no good solution at this point.

That's because they're stuck in what's known as the ACA's "family glitch" and don't have access to affordable coverage from an employer or subsidies through the exchanges.

This article will explain how the family glitch works and the solution the IRS has proposed to fix it as of 2023.

Who's Caught in the Family Glitch?

Here's the crux of the family glitch in terms of how the rules have worked from 2014 through 2022:

In order to be eligible to get premium subsidies in the exchange/marketplace, the second-lowest-cost Silver plan (benchmark plan) in your area has to cost more than a certain percentage of your income (note that there's normally an income limit of 400% of the poverty level to qualify for premium subsidies, but that has been eliminated in 2021 and 2022 by the American Rescue Plan).

But there's also another factor: Eligibility for subsidies depends on whether or not a person has access to an employer-sponsored plan that provides minimum value (covers at least 60% of average costs and includes substantial coverage for inpatient and physician care) and is considered affordable. For 2022, that's defined as coverage that doesn't cost more than 9.61% of household income for just the employee's coverage. (This percentage was not changed by the American Rescue Plan, despite the fact that the law reduced the percentage of income that people have to pay for self-purchased coverage in the marketplace.)

If the employee has family members, the extra cost to add them to the employer-sponsored plan isn't taken into consideration when determining whether or not the employer-sponsored plan is "affordable." Since most employers pay a significant portion of their employees' health insurance premiums, most employer-sponsored plans are considered affordable. And that "affordable" classification extends to the family members' coverage as well, even if the employer doesn't pay any of their premiums at all.

As an example, consider a family of five with a total household income of $60,000/year. That puts them at about 193% of the 2021 poverty level, which is used to determine eligibility for 2022 premium subsidies.

Let's assume that one parent's employer offers a good health insurance plan, and pays most of their employees' premiums. So the family only pays $100/month deducted from the paycheck to cover just the employee's premium. That's just 2% of their income—well under the 9.61% threshold—so the coverage is considered affordable. 

But what if it costs the family an extra $900/month to add the spouse and children to the employer-sponsored plan? Some employers don't cover any of the premium to add dependents, so this is not an uncommon scenario. Now the total payroll deduction for health insurance is $1000/month, which is 20% of their household income. But the whole family is still considered to have access to "affordable" employer-sponsored health insurance, because the affordability determination is based solely on what they pay to cover the employee, not the employee plus dependents and/or a spouse.

It's noteworthy that if the family had no access to employer-sponsored coverage at all, and had to purchase their own coverage, they would qualify for a premium subsidy that would bring the total family premium for the benchmark plan down to just 1.72% of their income in 2022 (with the American Rescue Plan's provisions in effect).

Fortunately, many of the children who would otherwise be caught in the family glitch are eligible for CHIP (Children's Health Insurance Program). But for those who aren't, and for spouses who are in the family glitch, coverage can still be out of reach, despite the fact that it's technically considered affordable. And although the American Rescue Plan has made coverage more affordable for millions of people who buy their own health plans, it has not changed anything for people who are made ineligible for subsidies due to the family glitch.

How Did This Happen?

The details of how the affordability of employer-sponsored coverage would be determined were clarified by the IRS in a final rule they published in 2013. And although the problem is widely referred to as the "family glitch," it's not really a glitch in the sense that it was carefully considered by the Government Accountability Office and the IRS before the regulations were finalized.

The concern was that if dependents in this situation were able to obtain subsidies in the exchange, it would increase the total amount that the government has to pay in subsidies. Since employers only have to make coverage meet the "affordable" criteria for their employees, there were worries that employers might cut back on the contributions that they make to dependents' health insurance premiums, thus sending even more spouses and kids to the exchanges for subsidized coverage.

Subsequent analyses have confirmed these assumptions; if affordability was based on the cost of coverage for all eligible family members, enrollment in the exchanges would grow significantly, and so would government spending on premium subsidies.

What Has the IRS Proposed To Fix the Family Glitch?

Democratic lawmakers in Congress have tried for years to fix the family glitch, but no progress had been made on that front as of 2022. However, the Biden administration is working on an administrative fix to the family glitch.

In 2022, the IRS proposed new rules, which are expected to be finalized before the start of the open enrollment period for 2023 health coverage. Under the proposed rule change, health insurance marketplaces would make two separate affordability determinations when an applicant has access to employer-sponsored health coverage.

The first would be the same as the existing affordability determination, checking to see if the employee's coverage is considered affordable. If it is, the employee would not be eligible for marketplace subsidies.

But the marketplace would then also determine whether the employer-sponsored coverage is considered affordable for the family, using the same percentage rules that apply to the employee's coverage (in 2022, the affordability threshold is 9.61% of household income and that percentage is indexed by the IRS each year).

Under the new rules, the employee would still not be eligible for marketplace subsidies if their employer's plan is affordable for them. But in some cases, their family members would potentially be eligible for marketplace subsidies.

Not all families affected by the family glitch will end up being eligible for marketplace subsidies. And some will choose to keep the employer-sponsored plan due to provider networks and overall benefits. But some families will find that they're newly eligible for marketplace subsidies as of 2023.

Summary

The ACA's family glitch makes health coverage unaffordable for some families. This is because people are not eligible for marketplace subsidies (for self-purchased health coverage) if they have access to employer-sponsored health coverage that's considered affordable. The affordability determination is based on only the cost of the employee's coverage, regardless of whether they have family members who need coverage as well. But if the employee's coverage is considered affordable, the rest of the family is also ineligible for coverage.

The IRS has proposed a solution to the family glitch, which is expected to be in place by 2023. It would involve a separate affordability determination for the family's coverage, and would make some family members eligible for premium subsidies in the marketplace.

A Word From Verywell

If your family has access to employer-sponsored health coverage that feels unaffordable, it's worth your while to at least check your eligibility for marketplace subsidies during the open enrollment period for 2023 coverage (November 1 to January 15 in most states).

You'll be able to see how much it would cost to purchase marketplace coverage for the rest of the family, and you can ask your employer how much it would cost to keep just the employee on the employer-sponsored plan. Then you'll be able to make an educated decision about how to best cover the whole family.