Additional Cafeteria Plan Changes in Effect January 1, 2023: IRS Notice 2022-41 and Family Coverage Affordability

IRS Notice 2022-41

On October 11, 2022, the Internal Revenue Service (IRS) issued Notice 2022-41, which will effectively expand the existing application of the change-in-status rules allowable under a Section 125 Cafeteria Plan. As a result of this Notice, on and after January 1, 2023, participants in a Sec. 125 Plan (other than a Flexible Spending Arrangement (FSA)) are permitted to revoke or modify an existing election for family coverage during a plan year in order for one or more family members to enroll in a Qualified Health Plan (QHP) through a Health Insurance Exchange on the individual market.

Provided specific conditions are met, employees can now on a prospective basis, elect out of family coverage and into self-only coverage (or family coverage including one or more already-covered related individuals) under a health plan mid-plan year.

It should be noted that the provisions of this Notice are optional. An employer must amend their Sec. 125 Cafeteria Plans to formally adopt these changes, as per the guidance. Employers must do so on or before the final day of the plan year in which the elections are allowed, and the amendment may be effective retroactively back to the first day of the plan year, provided that the Cafeteria Plan operates in accordance with the guidance under this Notice. The adoption of this amendment is likely considered ‘material’ and, therefore, should be completed through a Summary of Material Modifications (SMM) to the plan and corresponding notice should be sent to participants. As always, employers will want to ensure that both their plan rules and vendor permit them to adopt these changes and to ensure that they have properly coordinated the potential modifications to the plan with their insurer and/or TPA to determine their ability to accommodate the amendment. The Notice expressly prohibits an employer from amending a Cafeteria Plan to allow a retroactive revocation of coverage.   

The Department of the Treasury and the IRS have been instructed to modify the Income Tax Regulations under Sec. 125 of the Internal Revenue Code (IRC) to align with the conditions of this Notice. Pending any additional guidance, these changes will officially go into effect on or after January 1, 2023.

 

Family Coverage Affordability

Regarding the portion of this article that follows, the Affordable Care Act (ACA) requires employers with 50 or more full-time employees (Applicable Large Employers) to offer minimum essential coverage to full-time employees (and their dependents) or face a penalty.

• Employers are subject to the shared responsibility penalty if these additional conditions are met:

1) An employee has not been offered affordable self-only coverage (or hasn’t been offered coverage at all); AND

2) An employee has signed up for a plan through the Exchange where they are eligible or have received a subsidy*

*Note that the penalty is tied to whether the employee enrolls in coverage through the Exchange and receives a Premium Tax Credit (PTC) for themselves.

 

Please be aware - and do not be alarmed - that the employer mandate penalties will continue to be tied specifically to the self-only tier for the employer’s least expensive plan offering based on that year’s indexed percentage. Employers are not required to offer affordable family-tier coverage.

Notice 2022-41 was issued in conjunction with the Section 36B regulations, which pertain to the affordability of an offer of group health plan coverage for a related individual. The final rule alters the PTC guidelines for determining whether employer-sponsored coverage is considered affordable for family members. The PTC is open to eligible individuals who purchase health insurance coverage via the Exchange, but not to individuals with access to their employer-sponsored health coverage that provides minimum value and is deemed affordable.

When considering whether employer-sponsored coverage is affordable, the current methodology bases that determination on the lowest-cost self-only coverage available to an employee. However, it does not presently take into account the cost of family coverage.

Pursuant to Notice 2022-41, effective January 1, 2023, an employer-sponsored plan will be considered affordable – as it pertains to an employee’s dependents and their ability to receive a PTC - only if the portion of the annual premium the employee must pay for family coverage (the employee’s required contribution) does not exceed 9.5% of their household income, as adjusted for annual inflation. Further an employee’s required contribution for family coverage will now be based on the portion of the amount that the employee must pay for all of the people in their family, not just themselves individually.

• Employers’ plan sponsors should consider the implications of this new way to qualify for PTC. However, a plan will not owe a Sec. 4980H(a) tack hammer penalties merely because an employee qualified for a PTC under this new guidance. The Sec. 4980H(a) penalties will continue to apply to an employee who finds the employer’s plans to be unaffordable at the self-only tier at 9.12% of household income for 2023.

Beyond the new affordability testing rules, the regulations also introduce an enhancement to the minimum value rule that speaks to the minimum value of coverage for family members. Specifically, for purposes of a family member’s ability to receive a PTC, minimum value is now to be based on the benefits provided to those individuals under an employer-sponsored plan. These new family member provisions require that a plan’s minimum value percentage be at least 60% based on the plan’s share of the total allowed costs of benefits provided to the related individuals. Please note that this is separate from the minimum value as it concerns employees for purposes of the Affordable Care Act’s Employer Shared Responsibility requirements.

We will continue to monitor any associated litigation stemming from the issuance of this Notice and will provide necessary updates at that time. Please contact your AssuredPartners Account Manager with any questions.

 

Additional Links:

• April 13, 2022: New Regulations Proposed to Fix ACA’s “Family Glitch” in Effort to Lower Healthcare Costs for Family Coverage

August 2, 2022: ACA Affordability Rates Announced for 2023