Health Care Reform Developments: Coverage of Adult Children until Age 26
This is the third in a series of advisories we will issue on Health Care Reform. This alert focuses on provisions of the recently enacted health care reform bill, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (PPACA), which requires group health plans and health insurance issuers that provide dependent child coverage to make this coverage available until such children reach age 26. This rule becomes effective on the first day of the plan year beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans).
On April 27, 2010, the Internal Revenue Service published Notice 2010-38, which provides guidance on the federal tax implications of extending coverage to adult children until age 26. On May 10, 2010, the Departments of Treasury, Labor and Health and Human Services jointly issued Interim Final Rules providing additional guidance. This e-alert summarizes these new rules.
Compliance with these rules will require that plan sponsors review their current definition of eligible dependents, determine whether any current classes can or should be eliminated and amend the definition to comply with PPACA. Plan sponsors will need to work with their payroll administrators to make sure that the benefits are reported correctly for tax purposes, either as nontaxable, or in the case of certain individuals, taxable. Further, plan sponsors need to consider when to implement the changes and how to adequately and timely inform affected employees and dependents of their rights under PPACA.
Plans may not make dependent child coverage contingent on residency, support or other tax or financial dependency requirements. Plans are not required to offer dependent coverage, but if this coverage is offered, the plan must allow coverage until the child reaches age 26. The plan may not impose restrictions on coverage on the basis of a child’s financial dependency upon the employee (or any other person), residency with the employee (or any other person), student status, employment status, or marital status.
However, eligibility may be defined on the basis of the relationship between the child and the participant. For example, the plan may define eligibility based on the child’s status as a participant’s natural or adopted child; stepchild; or foster child.
This applies to grandfathered plans (those that were in effect on March 23, 2010) as well as non-grandfathered plans, and will require significant changes to the definition of eligible dependents for many plans.
Dependent coverage is a nontaxable benefit if the child meets the Internal Revenue Code definition of “child.” Dependent child coverage will be treated as a nontaxable benefit without regard to the traditional age, support and residency requirements previously imposed under the Internal Revenue Code if the covered child meets the definition of “child” under Internal Revenue Code Section 152(f)(1). This includes an employee’s son, daughter, stepson, stepdaughter, adopted child (or a child legally placed for adoption), and an “eligible foster child,” which is defined as an individual placed with the employee by an authorized placement agency or by judgment, decree or other order of a court of competent jurisdiction. This tax status applies until the end of the calendar year in which the child has reaches age 26. Thus, a plan may permit the child to remain on the coverage on a non-taxable basis and a health flexible spending account may continue to reimburse claims related to such child through the end of the year in which he reaches age 26.
Note that current tax rules still permit a plan to provide dependent coverage on a nontaxable basis to another class of dependents designated as “qualifying individuals” under Internal Revenue Code Section 152(d). A ”qualifying individual,” which may include an employee’s niece, nephew, or grandchild, may receive coverage on a nontaxable basis if the dependent meets certain residency and financial support tests.
It is not clear, however, whether the PPACA prohibition on financial support, residency and similar conditions with respect to an employee’s “child” also prohibits a plan from making coverage of qualifying individuals contingent upon meeting these residency and financial support requirements. Employers that extend dependent eligibility to such children will need to consider whether to continue to offer this coverage in light of the uncertainty about the plan’s ability to limit coverage on the basis of financial dependency, residence and similar conditions. If the decision is made to continue to extend coverage without the traditional dependency restrictions, and this results in coverage being extended to individuals who do not meet the tax conditions for a qualifying individual, it will be necessary to impute income in the same manner as income is imputed when a plan offers coverage for non-dependent domestic partners.
Many employers are considering providing “gap coverage” voluntarily to children who are currently covered under the plan but who will “age out” before the PPACA rule becomes mandatory. The Obama administration is encouraging employers and insurers to permit “gap coverage” to adult children who will otherwise lose coverage due to age limitations before the PPACA requirement becomes effective. Many of the largest national health insurers have agreed to do so.
The IRS guidance allows this gap coverage to be provided on a nontaxable basis for periods beginning on or after March 30, 2010. An employer also may (but is not required to) allow employees to change their current elections under Section 125 cafeteria plans, including health flexible spending accounts, to cover their adult children during the period of gap coverage. Pre-tax salary reduction contributions may not be made for periods prior to March 30, 2010. If the employer chooses to allow this, the cafeteria plan may be amended retroactively, but the amendment must be made no later than December 31, 2010.
Plans may not impose additional contributions or benefit limitations on adult children. The terms of a plan, including amounts charged for coverage, cannot vary based on the age of a covered child. Plans cannot create different premium structures based on an employee’s coverage of an adult child. The plan can, however, establish premium tiers based on the number of dependents covered (e.g., employee plus one child, employee plus two children, etc.)
Similarly, the plan cannot limit the benefit options available to adult children. For example, the plan cannot require an adult child to choose only HMO coverage.
Grandfathered plans are subject to a limited exception from the requirement to provide coverage to adult children if the adult child has coverage available from another employer-sponsored health plan. The guidance clarifies that the availability of coverage under another parent’s plan does not permit the grandfathered plan to deny coverage to the adult child. In that case, both plans must permit coverage. This exception for the availability of other employer-sponsored coverage expires in 2014.
Adult children who will become eligible for coverage by virtue of PPACA must be given the opportunity to enroll in the plan. The enrollment period must extend for a period of at least 30 days beginning not later than the first day of the first plan year that begins on or after September 23, 2010, and coverage must become effective not later than the first day of that plan year. This enrollment period is treated as a HIPAA special enrollment period, which permits the employee as well as the adult child to choose from among any of the benefit options offered under the plan. Written notice of the enrollment opportunity must be provided either to the adult child or to the employee parent not later than the first day of the 30 day enrollment period.
If you need assistance or have questions, please contact Evelyn Traub or Edie Lindsay.