Recent articles have flooded the internet regarding the term "family glitch" and its potential impact on leaving many children without coverage based on a faulty design in how Congress drafted the Affordable Care Act. The claim is that employers are not required to offer family coverage and need only provide self-only coverage to get out of the penalty, but by doing so the family is ineligible for the premium tax credit to subsidize insurance through the exchange. Is this claim true?
This is only partially true. The part that is incorrect is that an employer must still offer family coverage to avoid the penalty as §4980H(a) specifically states “….and their dependents…” thus, insurance must be extended to the children. However, due to the definition of “affordable,” effectively this will hold true.
The safe harbor for an employer to avoid the penalty is to offer insurance that is affordable. Under Regulations §1.36B-2(c)(3)(v)(A)(1) and (v)(A)(2), as well as the W-2 safe harbor under §4980H, affordable is defined as the employee paying no more than 9.5% of his/her household income for self-only coverage. An employer has the ability to avoid the penalty, force the employee to pay the full amount above self-only coverage, and disqualify the employee from the premium tax credit!
Take a typical single mom who makes $30,000 per year and has two kids. Self-only coverage costs $5,000, of which the employer pays $4,000, and family coverage costs $15,000. However, in order to obtain family coverage, the mother has to pay the difference of a full $11,000! Insurance is still deemed as affordable under both the employer penalty and individual credit provisions, even though it costs about 37% of her annual income!
It gets worse, the taxpayer is still technically responsible to cover her children or face the penalty. However, most taxpayers will either be exempt from the penalty under §5000A because the cost exceeds 8% or may receive government assistance. The family glitch effectively holds true; therefore, if a family falls through the cracks of government assistance and being excepted, the individual penalty still applies.
Featured in the TAXPRO Weekly - September 26, 2013