Last week, the Galen Institute released a short analysis I conducted explaining why an administrative fix to the Affordable Care Act’s (ACA’s) so-called family glitch would be both illegal and harmful. Dania Palanker, with the Georgetown University Health Policy Institute, criticized the analysis I conducted, saying it was not based on the administrative fix the Biden administration is considering. Although her critique contains substantial error about my analysis, it provided more detailed information about the administrative fix currently under consideration than was previously disclosed publicly. I now address that accordingly. For the most part, my original analysis remains unchanged.
First, some background is necessary to understand the family glitch. The ACA aimed to expand coverage to people who did not have another source of coverage. One way it did this was by making premium tax credits (PTCs) available to certain people to obtain a health insurance plan on the exchanges. For policy and political reasons, the law was constructed to avoid too much disruption in the employer market and minimize incentives for employers to drop coverage for employees and employees’ family members. It also aimed to minimize the corresponding aggregate PTC cost, as well as the total cost of the law under the political and budgetary constraints of that time. To accomplish these aims, the ACA contained an employer mandate requiring employers with at least 50 full-time employees to offer coverage to employees and employees’ children. It did not, however, require the employer to contribute to the premiums of insurance for workers’ children. It also prohibited PTCs from being accessed by individuals who received an offer of “affordable” employer coverage.
The ACA based affordability on the cost of self-only coverage for the employee. (The relevant statutory language is included below in the appendix.) If workers receive an offer of affordable self-only coverage, then they are ineligible for PTCs. Here is the key part: The workers’ dependents offered coverage by the firm also would be ineligible for PTCs, even if the firm provides little or no contribution toward the family coverage. Thus, if a firm offers affordable self-only coverage, every other family member who is offered coverage by the employer is ineligible for PTCs although they can purchase unsubsidized exchange plans. Some have referred to this as a “family glitch” since employees’ dependents may not have access to either affordable employer coverage or PTCs. Like it or not though, that is the actual law that Congress enacted in March 2010. There has not been any change to that part of the law since.
A decade ago, the Treasury Department, the Internal Revenue Service (IRS), and the Government Accountability Office carefully reviewed the statute in promulgating PTC regulations and reached this same conclusion. We know they did a considerable amount of work on the “family glitch” issue. After this thorough review and under substantial political pressure to make a different determination, the Treasury and IRS interpreted the statute the only way they could and in the way that the Joint Committee on Taxation and the Congressional Budget Office had previously interpreted it. They concluded that the statute did not allow family members of employees who received an offer of affordable self-only coverage to access subsidized coverage in the exchanges. Others have confirmed that the design of the ACA’s family glitch was purposeful. In April 2021, health insurance expert Louise Norris wrote that “The glitch was not an accident – basing affordability on the whole family’s premiums would have increased federal costs significantly.”
Ms. Palanker’s critique of my original draft shows that the fundamental misunderstanding of the issue is hers, not mine. Her misunderstanding is exposed when she writes that the family glitch is “a loophole in federal rules.” The truth is that it is a function of the statute’s construction. Of course, the framing she uses is helpful in supporting her conclusion that the IRS should reverse how it is enforcing the tax code to accommodate her political and policy interests. But the reality is that only Congress can establish the policy she advocates. She is also wrong that my premise is that an administrative fix would allow the entire family, including the worker, to receive PTCs. She apparently makes this unfounded leap because I wrote that an administrative fix would lead to a loss of employer coverage. As I explain below, an administrative fix would likely lead to millions of employees’ spouses and dependents replacing employer coverage with subsidized exchange coverage.
Ms. Palanker makes one fair point about my original paper, in which I raised the issue that an administrative fix to the family glitch might expand employer mandate penalties since large employers are generally penalized if they offer unaffordable coverage and if people who are offered that coverage obtain a PTC. While an administrative fix would increase the number of dependents who would access a PTC, I am now skeptical that an administrative fix would broaden the reach of the employer mandate. The employer mandate penalties are triggered only when an employee, and not an employee’s dependents, becomes eligible for and receives a PTC for exchange-based coverage.
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However, there remain numerous significant policy problems with any administrative fix, not to mention that an administrative fix would be illegal and would show that the IRS’s enforcement of the tax code is not separate from the political interests of the White House.
Policy Problems with a Family Glitch Fix
An administrative fix to the family glitch causes three inter-related and significant policy problems: 1) displacing private spending with government spending as dependents replace employer coverage with subsidized exchange coverage, 2) making coverage more complicated for families, and 3) significantly increasing federal spending.
Under the administrative fix the Biden administration appears to be considering, if an employer offers unaffordable family coverage, the worker would continue to be insured through the employer plan, but the worker’s dependents could qualify for a PTC to purchase an exchange plan.
The fact that big business groups support an administrative fix to the family glitch indicates that it would serve big businesses’ interests. Apparently, many large employers are looking to offload some of their costs of dependent coverage to the U.S. taxpayer. According to a Congressional Budget Office estimate from last year, a family glitch fix would cost $45 billion over a decade. (Think of this largely as a transfer from the U.S. taxpayers to big businesses.) Importantly, this estimate was done before the American Rescue Plan Act significantly expanded PTCs so the true cost will now be much higher.
The family glitch is estimated to affect 5.1 million people. However, only an estimated 451,000 of these individuals are currently uninsured—or less than 9 percent of the people who fall into the family glitch. The vast majority of people affected by the family glitch are spouses or child dependents who are covered by a family member’s policy. On average, employers finance most of the premium, paying 83 percent of the premium for single coverage and 73 percent of the premium for family coverage in 2020. The large taxpayer cost of “fixing” the family glitch would thus overwhelmingly benefit people who already have coverage—simply replacing private spending with more government spending (the latter, of course, is financed ultimately by taxpayers). Another cost of fixing the family glitch is that families would no longer have a single employer insurance plan to navigate but would instead have different plans for the employee and the employee’s dependents.
The Left Doesn’t Want to Pay for the Significant Cost of a Fix
The main reason that the Left and business groups want an administrative fix to the family glitch is that they do not want Congress to have to pay for it. They simply want the Biden administration to issue more government debt to deliver ever greater subsidies to health insurance companies for their latest political goals without burdening Congress to find offsets to finance the larger federal health care commitments. The reluctance to address this issue through Congress indicates the Left fears it does not have enough votes to make this change through open, accountable, and constitutionally required methods. Past Congressional efforts to address the family glitch, like former Senator Franken’s bill in 2014, have failed to gain traction.
Politicization of the IRS
Nothing with the law has changed since the last time the IRS reviewed this issue, other than the audacity that a new administration will be amenable to violating the law in pursuit of its political purposes to increase exchange enrollment. The most significant concern with any administrative fix is that it would show that the IRS’s enforcement of the tax code is subject to the political desires of the White House and powerful policy advocates rather than compliance with statute. The IRS, along with the Department of Treasury and the Government Accountability Office, extensively studied options to fix the family glitch a decade ago. They determined, as did the Joint Committee on Taxation and CBO, that the law was clear and unambiguous—the affordability of coverage for the purposes of PTC eligibility was a function of the price of self-only coverage and not family coverage.
While the ACA’s structure is complex and many in the White House and the progressive policy community want it changed, the IRS must enforce the tax code in the same manner regardless of which political party holds the White House. The Left’s campaign to pressure the IRS for an administrative fix is noxious and dangerous, regardless of policy considerations. If progressives wish to fix the family glitch, the legislative process is their constitutional path. It may be more difficult, but it should be achievable if this issue is as important as they believe it is.
Appendix: Statutory Language
In ACA Section 36B, the law states that an employer plan is affordable as long as the employee’s required contribution doesn’t exceed 9.5% of income. For “required contribution,” the statute refers to the definition in 26 U.S. Code §5000A, which pertains to the requirement to attain minimum essential coverage. The relevant excerpt is here:
B) Required contribution
For purposes of this paragraph, the term “required contribution” means—
(i) in the case of an individual eligible to purchase minimum essential coverage consisting of coverage through an eligible-employer-sponsored plan, the portion of the annual premium which would be paid by the individual (without regard to whether paid through salary reduction or otherwise) for self-only coverage, or
(ii) in the case of an individual eligible only to purchase minimum essential coverage described in subsection (f)(1)(C), the annual premium for the lowest cost bronze plan available in the individual market through the Exchange in the State in the rating area in which the individual resides (without regard to whether the individual purchased a qualified health plan through the Exchange), reduced by the amount of the credit allowable under section 36B for the taxable year (determined as if the individual was covered by a qualified health plan offered through the Exchange for the entire taxable year).
(C) Special rules for individuals related to employees
For purposes of subparagraph (B)(i), if an applicable individual is 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 required contribution of the employee.
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