The Treasury Department and the Internal Revenue Service, with uncharacteristic ambivalence, have proposed amending a longstanding regulation regarding eligibility for premium tax credits [PTCs] through the Affordable Care Act (ACA) marketplaces, or exchanges. Under the ACA, workers and their dependents are ineligible for PTCs when a worker has an “affordable” offer of employer-based insurance (ESI) offering at least “minimum value.” In an April 7, 2022 Federal Register notice, the agencies propose a new affordability test for dependents of workers with an offer of employer-sponsored insurance, stating that they have “tentatively determined” that the existing rule “is not required by the relevant statutes.”
The newly proposed affordability test is contrary to the statute. There is only one lawful affordability test for those with an offer of ESI, and it applies to workers and their dependents: If a worker must pay more than 9.5 percent of household income for self-only coverage, then she and her dependents qualify for PTCs.
The agencies offer a deeply flawed rationale for legislating a new affordability test for dependents, confusing an exemption from the ACA’s tax penalty on the uninsured for an entitlement to tax credits. After long deliberation beginning with the enactment of the ACA in 2010, the agencies correctly rejected the tortured misconstruction of the statute that they now proffer. The current rule, finalized in 2013, correctly construes the law; the proposed rule seeks to amend the law, a prerogative reserved to Congress.
The agencies’ error is rooted in a failure to differentiate between the ACA’s Internal Revenue Code (IRC) provisions that entitle a small portion of the population to PTCs and provisions that exempt various categories of uninsured people from the ACA’s tax penalties. Section 36B of the IRC establishes the tax credits and renders most Americans and legal residents, as well as all unlawful residents, ineligible for them. Section 5000A of the IRC imposes a tax penalty on the uninsured and exempts several categories of individuals from the penalty. (Although Congress has reduced that tax penalty to $0, it has left section 5000A on the books.)
The agency improperly, albeit tentatively, asserts that subparagraph 5000A(e)(1)(C), which determines whether uninsured dependents of workers with an offer of ESI are exempt from the tax penalty, could be construed as a “modification” of section 36B, thereby making such dependents eligible for PTCs. That impermissible reading reflects a fundamental misunderstanding of the statute’s structure, purpose and provisions.
Premium Tax Credits (Section 36B)
Section 36B of the IRC creates a premium tax credit to subsidize the purchase of exchange-based health insurance coverage. Subsections (a) and (b) define refundable credit amounts and set rules for their calculation. Section 36B(c)(2)(B) bars hundreds of millions of Americans—those who have another public or private source of “minimal essential coverage” (MEC)—from claiming the credit. In addition to Medicare and Medicaid beneficiaries, Children’s Health Insurance Plan (CHIP) recipients, and participants in TRICARE, Veterans Health Administration benefits and other forms of MEC, that provision generally disqualifies workers with ESI and their dependents from claiming PTCs.
Subparagraph 36B(c)(2)(C) carves out a discrete exception through a “special rule for employer-sponsored minimum essential coverage.” To qualify as MEC, an employer-sponsored plan must provide workers with coverage that has at least a “minimum value” and is “affordable.” A worker with access to ESI that meets both criteria may not claim a PTC. Nor can the worker’s dependents.
The statute defines affordability based exclusively on the amount a worker must contribute for self-only coverage under the plan. An employer-sponsored plan fails the affordability test if “the employee’s required contribution (within the meaning of section 5000A(e)(1)(B)) with respect to the plan exceeds 9.5 percent of the applicable taxpayer’s household income.” Subparagraph 5000A(e)(1)(B), cross-referenced in the subparagraph, defines “required contribution” as “the portion of the annual premium which would be paid by the individual … for self-only coverage.”
As noted, there is only one affordability test in section 36B, for both workers and their dependents. The final phrase of 36B(c)(2)(C)(i) establishes eligibility for dependents: “This clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee.” Thus, if a worker pays more than 9.5 percent of household income for self-only coverage, then—and only then—do the worker and his or her dependents become eligible for PTCs.
Tax Penalties And Exemptions (Section 5000A)
The NPRM tentatively suggests that section 5000A(e)(1)(C) (which determines whether an uninsured dependent is exempt from the tax penalty on the uninsured) could possibly be understood as a “modification” of the affordability test for workers established by section 5000A(e)(1)(B) and of the affordability test in 36B(c)(2)(C)(i). To arrive at their erroneous understanding of the statute, the agencies do violence to the structure and purpose of section 5000A.
Section 5000A(a) requires “applicable individuals” to maintain minimum essential coverage. Subsections (b)&(c) establish tax penalties on applicable individuals who do not maintain such coverage. Subsection (d) excludes specific categories of people from the definition of “applicable individual,” exempting them from penalties even though they do not have minimum essential coverage.
Subsection (e) exempts specific categories of uninsured “applicable individuals” from the tax penalty. Paragraph (e)(1) exempts uninsured “individuals who cannot afford coverage.” Subparagraph (e)(1)(A) establishes the general rule for determining whether an individual meets this test: An uninsured individual is exempt from the tax penalty if the cost of ACA-compliant individual insurance—the individual’s “required contribution”—exceeds 8 percent of their AGI.
Subparagraphs (B)&(C) establish special rules for workers and dependents offered ESI. Subparagraph (B) provides that if a worker’s “required contribution” for self-only coverage under their company’s health plan exceeds 9.5 percent of household income, the uninsured worker is exempt from the tax penalty. Subparagraph (C) establishes a special rule for individuals related to employees. For those who are “eligible for minimum essential coverage through an employer by reason of a relationship to an employee, the determination under subparagraph (A) shall be made by reference to the required contribution of the employee.” It provides that the calculation of such dependents’ “required contribution” is based on the special rule subparagraph (C) rather than the general rule in subparagraph (A).
Subparagraph (C), therefore, cannot be a “modification” of subparagraph (B), much less of 36B(c)(2)(C)(i). It is unambiguously a special rule for determining whether an uninsured dependent of a worker with ESI is exempt from tax penalties, and nothing more. This exemption from tax penalties does not create an entitlement to PTCs.
Dependents whom 5000A(e)(1)(C) exempts from tax penalties are no different from numerous other categories of individuals exempted under subsections 5000A(d)&(e). These include exemptions for members of certain religious sects, individuals enrolled in health sharing ministries, individuals not lawfully present in the U.S., incarcerated individuals, taxpayers with incomes below the filing threshold, members of Indian tribes, and any individual determined by the HHS Secretary “to have suffered hardship with respect to the capability to obtain coverage under a qualified health plan.”
All these individuals are exempt from the tax penalty established in section 5000A, and none of them, despite that exemption, are eligible for PTCs. The same holds for dependents of workers with an offer of ESI.
The NPRM Adopts An Impermissible Reading Of The Statute
Subparagraph 5000A(e)(1)(C) thus cannot be contorted into enlarging the entitlement to PTCs created by section 36B.
In their quest for a credible rationale for their “tentative determination,” the preamble notes that the Joint Committee on Taxation’s March 2010 technical explanation of the ACA’s tax provisions erroneously described the affordability test as applicable to the cost of family coverage. The JCT corrected its error on May 4, 2010. In its “ERRATA for JCX-18-10,” it noted that the determination of affordability is “based on self-only coverage.” The JCT staff thus made an error and later corrected it, as they did with the ten other errors they corrected in that document, including erroneous descriptions of the tax penalty on the uninsured and the so-called Cadillac Tax on certain employer-sponsored plans.
The agencies mischaracterize this error as “differing interpretations by the Joint Committee staff,” which “further demonstrate the statutory ambiguity that renders either interpretation available under the ACA.” But that is not how the Joint Committee staff characterize the document. They entitled their May 2010 publication “ERRATA” – Latin for “mistakes,” not “differing interpretations” or “ambiguities.” By their own admission, staff got it wrong on this and other matters in their March 2010 description of various ACA tax provisions; they corrected their mistakes six weeks later.
Congress Has Not Amended The Statute
Congress has long been aware of the so-called “family glitch.” Numerous bills have been introduced over the years to address this issue. None has gained enactment. Most recently, the House in June 2020 passed H.R. 1425, which would have amended 36B(c)(2)(C)(i) to substitute the word “family” for “self-only” coverage in determining PTC eligibility for dependents of covered workers. In sum, it would have amended the statute to achieve what the agencies improperly seek to accomplish through regulation. The Senate failed to pass the bill.
Congress’s refusal to amend the statute is more remarkable because it has recently enacted vast expansions of the ACA’s tax credits. On March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA) into law. The Act expanded the PTCs in various ways, enlarging them for those already eligible to receive them, entitling more people to receive them by removing the income cap, and making exchange-based coverage free to people receiving unemployment benefits. It did not, however, “fix” the ”family glitch.” The Build Back Better Act would extend many of ARPA’s expiring PTC expansions but would not address the “family glitch.”
The ACA does not establish a separate affordability test for family coverage that would entitle dependents of workers offered ESI to PTCs. Congress has considered legislation to establish a different test, based on the affordability of “family,” instead of “self-only,” coverage. It has not done so. The agencies cannot amend the law through rulemaking.
Should Congress ‘Fix’ The ‘Family Glitch?’
Congress could, of course, change its mind and amend section 36B in the way the agencies unlawfully propose. In making this determination, Congress must weigh the benefits of expanding access to PTCs against the disadvantages.
The benefits of such a policy change are apparent. Some families on whom ESI imposes financial burdens would see their burdens lightened. Some who are uninsured would qualify for government-subsidized health insurance. Some dependents in low-income households would receive free coverage under Medicaid and CHIP.
It also should consider the proposal’s cost—$45 billion over ten years, according to CBO—and the de minimis effect it would have on reducing the number of uninsured—190,000 people would gain coverage, according to the Urban Institute. That works out to $23,684 per newly insured person. “Fixing” the “family glitch” also would incentivize employers to reduce or eliminate their contributions to dependent coverage, as the agencies themselves acknowledge. It also would lead to what the agencies call “split coverage,” with family members on different plans with different networks and cost-sharing requirements. This, the agencies acknowledge, could increase their medical expenditures. Finally, it would increase burdens on states by shifting millions of people from ESI to Medicaid and CHIP.
Congress alone has the institutional capacity to weigh the upsides and downsides of “fixing” the “family glitch” and the constitutional authority to amend the statute. The agencies should withdraw their unlawful proposal and instead ask Congress to enact the policy they favor.