GAO to IRS: Consider the Family Penalty

By Joe Touschner

Say Ahhh! readers have heard all about the family penalty—the proposed rule that spouses and children won’t be able to access premium tax credits if employer-sponsored single coverage is affordable for a worker—even if the cost of family coverage would be out of reach. (Note that some also refer to this problem as the “family glitch” or “firewall”).

When the IRS published its final rule on the premium tax credits in May, it postponed a decision on the family penalty.  Now Congress’s independent watchdog agency—the Government Accountability Office—is calling on the IRS to consider the effects of the family penalty on children and whether an alternative approach might better fulfill the goals of the ACA.

GAO’s analysis confirmed that the family penalty could leave many children uninsured.  It found that the ACA will bring coverage to three-quarters of uninsured children.  But some—about 7 percent of those uninsured in 2009 or 460,000 kids—would be left out of coverage because of the family penalty (also known as the affordability test).

Another fascinating finding from the GAO’s analysis is how this number would change depending on the future status of CHIP.  Under the ACA, states must keep their CHIP eligibility levels in place through 2019.  After that, some state leaders might want to cover kids through exchange plans with premium tax credits rather than CHIP.  But, the GAO finds, about one-third of CHIP-eligible kids couldn’t get a tax credit because of the family penalty.  That’s 1.9 million children who would potentially be without coverage if exchange plans were used to replace CHIP and the affordability test remains in place as proposed.  The report helps show that CHIP will play an essential role in protecting children from the poor design of the affordability test.  Even if kids continue to be covered by CHIP, some families will struggle to afford coverage for the spouses who are also left out of premium tax credits by the family penalty.

Taking all this into account, the GAO recommends that the IRS consider other approaches to testing the affordability of employer-sponsored coverage.  We hope they’ll reconsider the proposed rule, too, and that IRS finds a way to assure that the benefits of the ACA are available for all children and families who need them.