ACA “Family Glitch” Increases Health Care Costs for Millions of Low- and Middle-Income Families

The Biden administration and Congress can make health insurance more affordable for millions of families by eliminating the so-called family glitch, which prohibits family members from enrolling in marketplace plans with lower premiums and cost sharing because one member of the family has an offer of “affordable” employer coverage. The family glitch deprives millions of people of access to affordable coverage.

Here’s how it works: under the Affordable Care Act (ACA), individuals receive subsidies to reduce premium costs for health plans purchased through the marketplace. In addition, the lowest-income enrollees are eligible for cost-sharing reductions that lower deductibles and copayments. But these benefits are not available to individuals who are eligible for affordable employer coverage. In 2021, coverage was defined as affordable if the premium was less than 9.83 percent of family income. The American Rescue Plan did not lower this threshold.

For families, affordability — for everyone, including eligible spouses and children — is determined based on the employee’s coverage. Even if the employer’s contribution is for the employee only, those costs are used in calculating affordability for the entire family. Family members are barred from getting subsidies in the marketplace, even if the cost of family coverage offered by the employer is above 9.83 percent of family income.

Family Glitch Locks Millions of Low- and Middle-Income Families Out of Subsidies

Because of the family glitch, millions of low- and middle-income families face unnecessarily high insurance costs. It is estimated that 5.1 million to 6 million people are ineligible for subsidies because of the glitch. More than a quarter of low-income nonelderly people (below 200% of the federal poverty level, or up to $34,480 for a family of two) and almost 10 percent of middle-income individuals (200%–399% of poverty, or $34,481 to $68,959 for a family of two) spend more than 9.83 percent of their after-tax income on employment-based premiums. Low-income families are more likely to be affected because costs as a share of income are significantly greater than for high-income families.

Consider a Montana couple, Steve and Julie, earning $34,000 combined annually (i.e., 197% of the federal poverty level). Montana had the second-highest annual growth in employer premiums for family coverage between 2010 and 2019; average deductibles are more than 5 percent of median income. Both Steve and Julie are 55 and working, but Julie does not have an offer of coverage through her employer. Steve works for a small employer that pays 100 percent of employees’ premiums. But while Steve’s employer offers coverage for spouses, the employer does not make any contribution to family coverage. Because Julie is eligible as a dependent on her husband’s employer health plan, she is not eligible for a premium tax credit on the ACA marketplace. Julie’s monthly premium for the employer coverage would be $805; her monthly premium in a subsidized marketplace plan would be $54, a difference of more than $9,000 annually.

The impact of the family glitch extends beyond premiums. Cost sharing for employer-based coverage in small firms is typically higher (e.g., average deductible is $2,295) than marketplace plans available to middle- and lower-income people. This is because marketplace plans come with subsidies that lower deductibles and other cost sharing. In this case, Steve’s plan has a deductible of $4,500 and maximum out-of-pocket spending of $7,500. If Julie enrolled in Steve’s plan, their family deductible would be $9,000 annually, which amounts to 26 percent of their income. If she purchased through the marketplace and was eligible for subsidies, she would have a deductible of only $900, and the total family deductible would drop to $5,400.

The glitch likely has an even bigger impact in states with lower median incomes. Workers in these states often pay a higher percentage of wages for combined premium and deductible. In nine southern states in 2019, the total cost of premiums and deductibles for single and family coverage was 14 percent or more of median income; in 37 states, the total cost was 10 percent or more.

Looking Forward

The Biden administration appears committed to expanding health coverage by strengthening the ACA. Eliminating the family glitch is one way to do this. Families caught in the glitch could pay 25 percent or more of their income on premiums, as opposed to the 8.5 percent maximum required by the American Rescue Plan. A recent executive order opens the door to revisit the family glitch through regulation. The Treasury Department can fix the family glitch by changing the regulation, and the Biden administration can make good on its promise to improve the affordability of health care coverage.