ACA Limits Premium Subsidies For Families of Covered Employees

A common question we receive about the Affordable Care Act (ACA) is: "If my spouse receives insurance through his/her workplace, but family coverage is too expensive, can family members access health insurance subsidies through the health insurance marketplaces?"

The answer is maybe, but in most cases no. Here's an overview of premium subsidies for family members of employees covered under a group health plan. If you're unfamiliar with the individual premium subsidies that will be available starting in 2014, see Individual Health Insurance Premium Subsidies in State Exchanges.

Whether an employees' family will be eligible for health premium subsidies in 2014 is based on affordability of the employer-sponsored coverage provided. The IRS recently clarified that affordability is based only on the cost of coverage for the individual employee, not on the cost of coverage for the family.

So, if the cost of employer-sponsored family coverage is prohibitive for the family, but the employee-only premium portion is defined by the IRS as affordable, federal subsidies will not be available to help buy insurance for the family through thehealth insurance marketplace.

This was clarified by the Obama administration on January 30, 2013, after the original definition in the 2010 health care law was seen as ambiguous. According to the recent IRS notice: "The proposed regulations provided that, for taxable years beginning before January 1, 2015, an eligible employer-sponsored plan is affordable for related individuals if the portion of the annual premium the employee must pay for self-only coverage (the required contribution percentage) does not exceed 9.5% of the taxpayer's household income." Read 2013-021360 notice here.

What is "Qualified" and "Affordable" Coverage?

The employer-sponsored plan is considered "qualified" and "affordable" by IRS definitions if:

• Qualified: The plan has an actuarial value of at least 60%, and 
• Affordable: The household’s share of the employee's premium does not exceeds 9.5% of income. Again, this calculation will be based solely on the cost of individual coverage, what the employee would pay for “self-only coverage.”

Gap for Many Working Families

This creates a gap for many working families. According to the Kaiser Family Foundation, total premiums for employer-sponsored health insurance in 2012 averaged $5,615/year for individual coverage and $15,745/year for family coverage. The employee’s share of the premium averaged $951/year for individual coverage and more than four times as much, $4,316/year for family coverage.

By the IRS definition, such costs would be considered affordable for a family making $35,000 a year, even though the family would have to spend 12% of its income for full family coverage under the employer’s plan. Under ACA's definition, this family would not be eligible for health insurance subsidies.

Eligibility Test for Individual Health Premium Subsidies, for Family Members

First, is employer coverage available to you ("you" being the spouse or family member)?

• No... then you may be eligible for subsidies based on your household size and income. See chart below, and What Is My Individual Health Insurance Tax Credit?
• Yes... continue.

Is the employer coverage considered a "qualified" plan (does the plan cover at least 60% of health expenses on average)?

• No... then you may be eligible for subsidies based on your household size and income. 
• Yes... continue.

How much does the employee pay for the "employee-only" portion of the premium? What percentage is this of household income?

• Higher than 9.5%... then you may be eligible for subsidies based on your household size and income. 
• 9.5% or lower... family members are not eligible to receive subsidies. 

We've previously posted this chart from the Kaiser Family Foundation, but it provides a helpful visual guide for eligibility:

Affordability Definition For Premium Subsidies Too Narrow?

The IRS proposed this definition of "affordable coverage" in August 2011 and made no changes despite objections from advocates for children and low-income people and many employers. Employers did not want to be required to pay for coverage of employees’ dependents. But many employers argued for allowing family members to access subsidies so they could buy affordable insurance on their own. However, that would have increased costs to the government, requiring the government to foot the bill on more subsidies.

The New York Times reported on January 30, 2013: “This is bad news for kids,” said Jocelyn A. Guyer, an executive director of the Center for Children and Families at Georgetown University. “We can see kids falling through the cracks. They will lack access to affordable employer-based family coverage and still be locked out of tax credits to help them buy coverage for their kids in the marketplaces, or exchanges, being established in every state.” 

Under the law, residents that do not maintain insurance will be subject to a tax penalty. However, there is an affordability exception to the individual mandate tax penalty. The uninsured children and spouse of an employee would be exempt from the penalties if the cost of coverage for the entire family under their employer’s plan was more than 8% of household income. This helps some, but it still leaves families that can’t afford health coverage through their employer nor on their own without the premium subsidy.