By ROBERT PEAR
WASHINGTON — The Obama administration adopted a strict definition of affordable health insurance on Wednesday that will deny federal financial assistance to millions of Americans with modest incomes who cannot afford family coverage offered by employers.
In deciding whether an employer’s health plan is affordable, the Internal Revenue Service said it would look at the cost of coverage only for an individual employee, not for a family. Family coverage might be prohibitively expensive, but federal subsidies would not be available to help buy insurance for children in the family.
The policy decision came in a final regulation interpreting ambiguous language in the 2010 health care law.
Under the law, most Americans will be required to have health insurance starting next year. Low- and middle-income people can get tax credits to help them pay premiums, unless they have access to affordable coverage from an employer.
The law specifies that employer-sponsored insurance is not affordable if a worker’s share of the premium is more than 9.5 percent of the worker’s household income. The I.R.S. said this calculation should be based solely on the cost of individual coverage, what the worker would pay for “self-only coverage.”
“This is bad news for kids,” said Jocelyn A. Guyer, an executive director of the Center for Children and Families at Georgetown University. “We can see kids falling through the cracks. They will lack access to affordable employer-based family coverage and still be locked out of tax credits to help them buy coverage for their kids in the marketplaces, or exchanges, being established in every state.”
In 2012, according to an annual survey by the Kaiser Family Foundation, total premiums for employer-sponsored health insurance averaged $5,615 a year for single coverage and $15,745 for family coverage. The employee’s share of the premium averaged $951 for individual coverage and more than four times as much, $4,316, for family coverage.
Under the I.R.S. rule, such costs would be considered affordable for a family making $35,000 a year, even though the family would have to spend 12 percent of its income for full coverage under the employer’s plan.
The tax agency proposed this approach in August 2011 and made no change in the definition of “affordable coverage” despite protests from advocates for children and low-income people and many employers. Employers did not want to be required to pay for coverage of employees’ dependents. But they said that family members should have access to subsidies so they could buy insurance on their own.
However, that would have increased costs to the government, which would have been required to spend more on subsidies.
Paul W. Dennett, senior vice president of the American Benefits Council, which represents many Fortune 500 companies, said: “Individuals who do not have affordable family coverage should be eligible for premium tax credits in the exchange. The final rule does not provide that.”
Under the law, people who go without insurance will generally be subject to tax penalties. In a separate proposed regulation issued on Wednesday, the Internal Revenue Service said that the uninsured children and spouse of an employee would be exempt from the penalties if the cost of coverage for the entire family under an employer’s plan was more than 8 percent of household income.
Bruce Lesley, the president of First Focus, a child advocacy group, said: “The administration recognizes that the cost of family coverage will be unaffordable for many families. They will not have to pay the penalty. But that will not be much of a consolation to families who cannot get health insurance for their kids.”
The 2010 health care law extended Medicaid to many childless adults and others who were previously ineligible. The Supreme Court said the expansion of Medicaid was an option for states, not a requirement as Congress had intended.
Kathleen Sebelius, the secretary of health and human services, said Wednesday that she wanted to use her discretion to prevent the imposition of tax penalties on certain uninsured low-income people in states that choose not to expand Medicaid.
A rule proposed by her department would guarantee an exemption from the penalties for anyone found ineligible for Medicaid solely because of a state’s decision not to expand the program. The administration said this was “an appropriate use of the hardship exemption.”
About 20 states are expected to expand Medicaid; governors in other states are opposed or uncommitted. Many illegal immigrants, prisoners and members of certain religious groups opposed to the acceptance of insurance benefits will also be exempt from penalties if they forgo coverage, the administration said.
The Congressional Budget Office predicts that 30 million people will be uninsured in 2016 and that 6 million of them will pay penalties.