‘Family glitch’ fix updated to include calendar-year cafeteria plans

On October 11, 2022, the IRS issued final regulations to fix the so-called “family glitch” loophole in the Affordable Care Act (ACA), which affects eligibility for premium tax credits when purchasing health coverage on the ACA exchange. The IRS also issued Notice 2022-41, which allows employees, spouses and dependents to drop employer-sponsored family health coverage and enroll in subsidized exchange coverage midyear (rather than just during the annual open enrollment or special enrollment periods) if the employer plan sponsor amends its cafeteria plan to allow for such changes.¹

Originally, the guidance applied only to non-calendar year cafeteria plans; however, a revised version of Notice 2022-41 was recently released, unannounced, that allows the additional permitted election change event to be adopted for any cafeteria plan, both calendar year and non-calendar year.

Applicable large employers (ALEs) that are subject to the ACA’s employer mandate should note that these final regulations do not impact the affordability or minimum value analysis under those rules; therefore, as long as an ALE offers affordable, minimum value coverage to its full-time employees and their dependents (based on self-only coverage affordability), the employer would not face employer mandate penalties under the tax code.

Employer plan sponsors should determine whether to amend their cafeteria plans to allow election changes for those family members of employees who may be eligible for ACA exchange coverage with premium tax credits. Employers choosing to amend their plans must do so within the time frames set out in the notice.

Footnote

¹ For more information on the final regulations adopted to fix the “family glitch” loophole, see “IRS finalizes ‘family glitch’ fix,” Insider, October 2022.