What Is the IRS Family Glitch and How Is It Fixed?
If your employer's family health plan seems too expensive, a recent rule change may now allow your family to qualify for subsidized ACA Marketplace plans.
For years, the Affordable Care Act’s (ACA) “family glitch” prevented many families from accessing affordable health insurance. This issue stemmed from a rule that based insurance affordability only on the cost for the employee, locking their families into expensive employer-sponsored plans. Fortunately, the federal government has implemented a new rule to resolve this problem, opening up new possibilities for affordable healthcare coverage.
The Original Family Glitch Explained
The family glitch was rooted in how the Affordable Care Act’s affordability test was calculated. Under the original interpretation, whether an employer’s health plan was “affordable” depended solely on the cost of coverage for the employee. The higher premium required to add a spouse or children was not factored into this determination, creating a major discrepancy for many families.
For instance, an employee might have been required to contribute a small amount for their individual coverage, satisfying the ACA’s affordability threshold. However, the cost to upgrade to a family plan could be substantial, consuming a large portion of the household’s income. Because the employee-only coverage was officially deemed affordable, the entire family was barred from receiving premium tax credits on the Health Insurance Marketplace, leaving them with no affordable options.
This situation created a significant financial burden, as employer-sponsored family coverage could be thousands of dollars more than an individual plan. The rule primarily affected low and middle-income families, who were most in need of financial assistance but were locked out by the glitch, leaving an estimated 5.1 million people without a viable path to affordable health insurance.
The New Affordability Rule
In October 2022, the Department of the Treasury and the Internal Revenue Service (IRS) issued a final rule that fixed the family glitch, effective starting with the 2023 plan year. This new regulation changes how affordability is determined for an employee’s family members. The updated rule establishes a separate affordability test for dependents based on the cost of family coverage.
Under the new standard, an employer’s family health plan is considered unaffordable if the portion of the annual premium the employee must pay for family coverage is more than a specific percentage of the total household income. This percentage is adjusted annually for inflation; for 2025, the threshold is 9.02% of household income. This change ensures the calculation reflects the actual cost a family would incur.
If an employer’s family plan is deemed unaffordable under this new test, the employee’s family members become eligible for premium tax credits on the Health Insurance Marketplace. This eligibility applies only to the dependents. If the employee’s individual coverage remains affordable under the original test, the employee is not eligible for a subsidy, but their family members can seek a subsidized Marketplace plan.
This regulatory fix does not alter the employer mandate for applicable large employers to offer affordable coverage to their full-time employees. The IRS also issued guidance allowing employers to amend their cafeteria plans so employees can drop family members mid-year, enabling them to enroll in a Marketplace plan without delay.
Determining Your Eligibility for Marketplace Subsidies
To determine if your family members are eligible for subsidies, you must gather specific financial information and perform a calculation. This process assesses whether the cost of your employer-offered family plan is considered unaffordable under the new IRS rule.
First, you need to identify your household’s Modified Adjusted Gross Income (MAGI). For ACA purposes, MAGI includes the adjusted gross income from your tax return plus any untaxed foreign income, non-taxable Social Security benefits, and tax-exempt interest. You will also need to find the premium cost for the lowest-cost family health plan offered by the employer, which is typically found in benefits enrollment documents.
Once you have these two figures, you can perform the affordability calculation. Divide the total annual premium for the employer’s family plan by your annual household MAGI. For example, if the family premium costs $8,000 per year and your household income is $75,000, the cost represents 10.67% of your income. If this percentage is higher than the 2025 affordability threshold of 9.02%, your family’s coverage is considered unaffordable.
Completing this calculation confirms whether your family members are likely eligible for premium tax credits. Having this information ready will streamline the process when you are ready to apply for coverage through the Health Insurance Marketplace.
How to Switch to a Marketplace Plan
Once you determine that your employer’s family coverage is unaffordable, your family members are eligible for a Special Enrollment Period (SEP). An SEP allows you to enroll in a new health plan through the Health Insurance Marketplace outside of the standard Open Enrollment window. This is triggered because your family has gained access to a new subsidized coverage option.
To begin the process, visit the official Health Insurance Marketplace website, HealthCare.gov. There, you can create an account or log into an existing one to start an application. The application will ask for the household income and employer coverage cost information that you previously gathered.
The online application will walk you through questions to confirm your eligibility for the SEP and to calculate the premium tax credit your family can receive. You will need to provide details about your household size, income, and the specifics of the health plan offered by your employer.
After submitting the application, you will be able to view all the available health plans in your area. The Marketplace will display the plans with the premium tax credit already applied, showing the final monthly premium you would pay. You can then compare plans based on their premiums, deductibles, and provider networks before selecting one.