Potential IRS rule change could increase Obamacare subsidies

Update: On April 5, 2022, the Biden Administration announced they are “proposing a rule to strengthen the ACA by fixing the ‘family glitch.'” President Biden, Vice President Harris, and former President Obama are expected speak in the Rose Garden at 1:30 pm EDT.

On April 1, the president of the Center for a Free Economy Ryan Ellis wrote a Wall Street Journal op-ed about troubling new powers that Congress gave the Internal Revenue Service (IRS) to track a widespread number of additional transactions and how “[n]ext tax season will be a nightmare.” 
 
Worse is when the IRS takes actions that Congress did not authorize. A proposed rule put forth by IRS—which cleared review by the Office of Management and Budget and the White House on March 29—could make millions of people with access to employer-sponsored coverage eligible for ACA subsidies by “fixing” the so-called family glitch. I’ve written a research paper for the Galen Institute and a Forbes blog on this subject. 
 
Here’s the issue in brief: The ACA created large subsidies for people to purchase plans in the individual health insurance exchanges. However, the subsidies were so large that Congress was concerned Obamacare’s fiscal cost would be untenable. So, it prevented people with access to an affordable employer plan from receiving subsidies. The trick was determining whether an offer of employer-sponsored coverage was affordable.  

The ACA based affordability only on the cost to a worker of self-only coverage. If a worker receives an offer of affordable self-only coverage (defined, for 2022, as a premium payment of less than 9.6% of wages), then the worker’s household is ineligible for ACA subsidies.  

Thus, if the firm offers coverage of dependents but provides little or no contribution toward their premiums, the worker’s dependents are ineligible for ACA subsidies. 
 
This issue has been dubbed the “family glitch” although the law was written this way intentionally. As health insurance and ACA expert Louise Norris wrote, “The glitch was not an accident – basing affordability on the whole family’s premiums would have increased federal costs significantly.”
 
Back in 2011 and 2012 when the Obama administration was writing regulations to implement Obamacare, they spent enormous time on the family glitch. Many progressives pushed for a broader interpretation with affordability measured on family coverage instead of self-only coverage. But the Treasury Department, the IRS, the Government Accountability Office, the Joint Committee on Taxation, and the Congressional Budget Office all reached the same conclusion—the statute based affordability on the cost of self-only coverage. And the statute has not been amended to change that.
 
As of this writing, it is unclear exactly what IRS will propose in this rule. However, it is possible that IRS has decided to ignore the law based on political pressure.
 
Regardless of the policy merits, this politicization of IRS’s enforcement of the tax code is dangerous—not to mention that it would likely lead to billions of dollars of new spending that was not authorized by Congress.

Finally, as a policy matter, 91 percent of the people affected by the family glitch already have coverage, with almost all of them covered by private insurance. The main policy implication of a new and unlawful IRS interpretation would not be to reduce the number of uninsured but to instead replace employer-sponsored coverage with heavily subsidized exchange-based coverage. Such an interpretation would also mean many more employers would stop offering affordable family coverage, so more families would end up on separate plans and taxpayer costs would explode. 
 
If the IRS does take such actions, Congress should launch an investigation into the political pressure put on the IRS. It should demand to see all the analyses conducted by IRS and Treasury during the Obama administration. Again, these analyses concluded that the proper legal interpretation of the statute based affordability just on the cost of self-only coverage for the employee. They also should demand to see all the analyses the Biden administration relied on to change this statutory interpretation as well as all communications between political employees in the White House and IRS and Treasury officials and staff on this issue.

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This piece was originally posted as a portion of the Paragon Health Institute newsletter.

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