Issue 1: Health Care Coverage for Adult Children

Welcome to our Health Care Reform Management Alert Series. This is the first in a planned series of alerts for employers on selected topics in health care reform. As the dust starts to settle following the passage of health care reform, employers are beginning to wrestle with the difficult issues raised by the legislation. While compliance dates are staggered over the next several years, many issues must be dealt with soon. The Seyfarth Shaw Health Care Reform Team has already provided you with a broad summary of health care reform [click here to access summary]; however, some topics are particularly complex and deserve a more in-depth analysis to understand the implications.

Each installment in this series will focus on one of these topics. This series will be of interest to you and will assist you in your efforts to manage the impact of health care reform on your employer-sponsored plans.

[√] Applies to grandfathered plans [√] Applies to new health plans

 

Mandatory Health Coverage for Adult Children

The Patient Protection and Affordable Care Act (PPACA), as modified by the Health Care and Education Reconciliation Act of 2010 (HCERA) (collectively the “Act”) requires group health plans and health insurance issuers that provide dependent health coverage to continue such coverage for adult children until their attainment of age 26, regardless of whether a child is married or is a student. The Secretary of Health and Human Services has been instructed to promulgate regulations to define the dependents to whom the coverage shall be made available. (For example, regulations may address whether support and residency requirements must be removed from a plan’s dependent definition.) We do know, however, that for plan years beginning before January 1, 2014, grandfathered plans are not required to provide coverage to an adult child who is eligible to enroll in another employer-based health plan. It is also clear that the new rule does not require group health plans to offer dependent coverage. However, we have no guidance as to how much employers can charge participants for continued coverage.

Taxation and Notice 2010-38

The Act amended the Internal Revenue Code (Code) to provide that employer-provided reimbursements for the medical care of an employee’s adult child are non-taxable until the end of the year in which the child attains age 26. On April 27, 2010, the Internal Revenue Service issued Notice 2010-38, providing guidance on the tax treatment of health coverage of adult children. This new guidance is significant in that it addresses several of the important issues affecting employers and provides significant flexibility in the implementation of the new requirements. In summary, the Notice:

• Provides that both the coverage provided under an employer’s group health plan as well as reimbursements for medical care provided to a child who has not attained age 27 as of the end of the employee’s taxable year are excludable from an employee’s gross income.
• Makes it clear that coverage for a child under 27 may be paid on a pre-tax basis under a Code Section 125 cafeteria plan, and that participants may make pre-tax contributions to a health flexible spending arrangement (FSA) that may be used to reimburse medical expenses incurred by a child under age 27.
• Clarifies that expenses incurred by a child under age 27 may be reimbursed from a health reimbursement arrangement (HRA). (Insofar as the guidance does not mention health savings accounts (HSAs) and the Act did not amend Code Section 223 which governs HSAs, it does not appear that expenses incurred for adult children may be reimbursed from an HSA.)
• Announces that the Department of Treasury intends to amend the change in election rules retroactively to March 30, 2010, to provide that becoming eligible for coverage or remaining eligible for coverage beyond the date on which the child would have otherwise lost coverage may be considered a change-in-status event permitting participants to change their pre-tax elections.
• Provides a transition rule for cafeteria plan amendments to permit employers to retroactively amend their cafeteria plans to the first date in 2010 that employees are permitted to make pre-tax contributions to cover their adult children (but not earlier than March 30, 2010); provided, however, that the amendment is adopted by no later than December 31, 2010. (Under proposed cafeteria plan regulations, amendments are only permitted to be effective prospectively.)
• Permits employers to rely on an employee’s representation as to the child’s date of birth for purposes of tax treatment.

Applicability of New Rule

Under PPACA, the mandatory coverage rule for adult children applies to group health plans as if the rule was included in the HIPAA portability requirements found in the Code and the Employee Retirement Income Security Act of 1974 (ERISA). The HIPAA portability rules contain an exemption for small group health plans with fewer than two participants who are current employees. Thus, retiree-only plans have traditionally been considered exempt. Although PPACA amends the Public Health Service Act to eliminate this exemption, PPACA did not amend the corresponding provisions of ERISA and the Code. For this reason, it appears that the mandatory coverage rule may not apply to self-funded group health plans that have fewer than two participants who are current employees (i.e., retiree-only plans).

In addition, the mandatory coverage rule would not apply to plans that provide “excepted benefits,” such as limited scope dental and vision benefits (provided under a separate policy, certificate or contract of insurance).

Effective Dates

The mandatory adult child coverage rules are effective for plan years beginning after September 23, 2010. However, the changes in taxation described above were effective March 30, 2010.

Employer Action Plan

• Employers who impute income for coverage provided to adult children should immediately cease imputing income for those who will not attain age 27 by the end of the year.
• Group health plans providing coverage for dependents will have to be revised to provide that coverage will continue until the child turns age 26, and to eliminate coverage requirements relating to a child’s full-time student status, tax dependent status and/or marital status (subject to the exception for grandfathered plans that are not required to provide coverage to adult children eligible to enroll in another employer-sponsored health plan).
• Employers should revise their cafeteria plans in order to allow employees to pay for coverage for adult children with pre-tax dollars and/or to allow employees to change their election to add or continue coverage for adult children.
• Employers who sponsor health FSAs and HRAs should decide whether to amend their plan so that expenses incurred for adult children will be reimbursable.

For further details, or if you have any questions regarding health care coverage for adult children, contact your Seyfarth Shaw LLP attorney or any Employee Benefits attorney listed on the website.