Update: Initially the IRS Notice 2022-41 only permitted mid-year election changes for non-calendar year cafeteria plans. However, the IRS recently updated its guidance to allow mid-year changes for all cafeteria plans.

Earlier this year, we wrote about the IRS Proposed Rule Impacting Affordability for Family Coverage and on October 13, 2022, the IRS issued its Final Rule, with an effective date of December 12, 2022. Along with the final regulations, the IRS also released Notice 2022-41, permitting additional mid-year election changes for cafeteria plan coverage. Both the Final Rule and Notice will expand access to affordable health care coverage starting in 2023.

Background

Since 2014, the Affordable Care Act (ACA) has provided individuals who did not have affordable minimum value coverage through their employer-sponsored group health plan (GHP), a subsidy in the form of a premium tax credit (PTC) for purchasing coverage on the Marketplace Exchange (Exchange). For purposes of PTC eligibility, the plan’s affordability determination was based on whether the lowest cost, employee-only coverage offered did not exceed 9.5% (as adjusted) of household income. If self-only coverage offered to an employee met affordability requirements, then both the employee and the employee’s family members were ineligible for the PTC, even if family coverage offered by the employer was not affordable. This preclusion of family members from subsidy eligibility has become known as the “family glitch.”

Fixing the “Family Glitch”

Beginning in 2023, the new regulations will eliminate the “family glitch” by basing the affordability of employer-sponsored health coverage for a family member on the cost of family coverage, rather than employee-only coverage. Specifically, the plan’s affordability will be based on whether the cost for family coverage does not exceed 9.5% (as adjusted) of household income. Thus, family members that are offered unaffordable coverage could become eligible for subsidized coverage on the Exchange.

Allowing New Change in Status Event

In conjunction with the Final Rule, the IRS issued Notice 2022-41. This Notice expands the available change-in-status events allowed under the Internal Revenue Code for cafeteria plans, starting in 2023.

Under the new rule, a cafeteria plan may allow employees to revoke their coverage elections mid-year specifically for family members who are enrolled on their employer-sponsored plan, except for health flexible spending accounts (health FSAs), and allow the family members to enroll on the Exchange to claim a PTC. This means the employee would be able to elect out of their employer sponsored family coverage and into self-only coverage. If an employer chooses to adopt this cafeteria plan change, coverage may only be changed by the employee on a prospective (and not retroactive) basis.

Further, these mid-year changes are only allowed for one or more related individuals that are eligible for a special enrollment through the Exchange and who intend to enroll in new Exchange coverage immediately following the termination of coverage under the employer’s plan. An employer can rely on a reasonable representation by the employee regarding members of their family enrolling on the Exchange.

Plan Amendment and Timing

Finally, employers should note that this change to their cafeteria plan is optional and not required. An employer that intends to adopt this new election change must amend their cafeteria plan by the last day of the plan year in which the change is permitted (with the change effective back to the first day of the plan year, so long as the plan was operated in accordance with the adopted changes and employees are notified). However, for amendments specifically impacting a plan year beginning in 2023, guidance provides that the plan amendment can be adopted on or before the last day of the plan year beginning in 2024. Please note that some cafeteria plans are written to allow “all change in status events” allowed under the Internal Revenue Code, so employers will want to review their plan documents and determine whether they need to further amend their plan to correspond with how the plan will be operated.

Employer GHP Impact

As a practical matter, note that if an employer plan’s family tier premiums are high, adopting these changes may cause a decrease in enrollment in the plan, which can impact employer costs and claims experience. Additionally, if the employee’s family obtains coverage on the exchange while the employee remains on the employer’s plan, the family would potentially have increased costs with multiple deductibles and maximum out-of-pocket limits.

ACA Employer Shared Responsibility Impact

The Final Rule does not expand on coverage requirements and/or penalty risks for purposes of the ACA Employer Shared Responsibility (ESR) mandate. As such, applicable large employers (ALEs) will continue to determine affordable coverage based on the lowest-cost, self-only coverage offered to employees. The final regulations also do not affect the data required for Forms 1095-B and Form 1095-C related to ACA reporting.

Employer Actions

  • To allow mid-year election changes for the 2023 plan year, employers must communicate the change to employees by the first day of the 2023 plan year as well as operate the plan in accordance with the change.
  • To properly adopt these plan changes, cafeteria plan documents must be updated by the employer before the last day of the plan year that begins in 2024.

Additional Resources

The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog. © 2022 Sequoia Consulting Group. All Rights Reserved.

Tina Barile — Tina is a Client Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline benefits compliance. In her free time, Tina enjoys being with family, cooking, reading, and playing sports.