On May 13, the Internal Revenue Service, the Department of Labor, and the Department of Health and Human Services jointly issued a rule implementing a provision of the Patient Protection and Affordable Care Act (PPACA) that allows young adults to be covered by their parents' insurance policies until they reach age 26. The interim final rule becomes effective July 12. These new requirements generally apply to group health plans and group and individual health insurance issuers for plan and policy years beginning on or after September 23, 2010, or January 1, 2011, for calendar-year plans. Comments will be accepted until August 11.
The rule is rather straightforward: group and individual health plans that offer dependent coverage of participants' children must make such coverage available until a child reaches age 26. Further, the new rule eliminates a plan's ability to impose restrictions on dependent care coverage generally, and requires coverage for adult children to be equivalent in substance and cost to coverage options offered other dependents.
The agencies estimate that, of the approximately 29.5 million individuals aged 19 to 25 (young adults) in the United States, approximately 2.37 million might be affected by this provision.
The term "dependent coverage" as used in these rules means coverage of any individual under the terms of a group health plan, or group or individual health insurance coverage because of his or her relationship to the participant.
- Group plans or issuers may not restrict coverage of any child under the age of 26 based on factors such as financial dependency, residency, student status, marital status, or employment.
- A plan or issuer is not required to provide coverage to the spouse or child of a child receiving dependant coverage.
- The terms of the plan or health insurance coverage cannot vary based on the age of the child. For instance, a premium surcharge for coverage of young adults is not allowed unless the same surcharge is imposed for all dependents.
Basically, age (under 26) and relationship to the employee or plan participant are the only factors that may be used to determine eligibility for dependent coverage, with one exception. Until January 1, 2014, a grandfathered plan does not need to offer coverage to a young adult if that young adult is eligible for employer-sponsored coverage (other than through his or her parents). After January 1, 2014, eligibility for other coverage is irrelevant.
The interim final rule provides a transitional rule for children whose coverage ended, or who were denied coverage, due to their age and who will now become eligible for coverage. Such individuals must be given at least a 30-day notice of their enrollment eligibility (notice may be provided through the employee). The effective date for these newly enrolled dependent children is no later than the first day of the plan year beginning on or after September 23, 2010. Any child enrolling in health coverage as a result of this transition rule must be offered the same benefit packages available to "similarly situated individuals" and employees must be given the opportunity to revise their coverage options appropriately. The regulations provide a few examples to illustrate this transition rule.
Additional guidance issued April 27 by the Internal Revenue Service (Notice 2010-38), explains corresponding changes to tax rules so that coverage and reimbursements adult children under age 27 will not be treated as taxable income to the employee. The notice also clarifies, that qualifying coverage and benefits for adult children will not be considered wages for FICA and FUTA purposes. In addition, the exclusion also carries over to the definition of benefits for Section 125 cafeteria plans, including health flexible spending accounts. Institutions will likely need to revise their plan documents to address these changes in coverage.
Many health plans have indicated that they intend to extend coverage for young adults earlier than they are required to. The new tax benefit is effective from March 30, so benefits will not be taxable for adult children who remain covered under the institution's plan or are added to the institution's plan at any time.
Please note: the tax provisions cover benefits for young adults up to age 27, unlike the new health care requirement to provide coverage to dependent children up to age 26. This allows some leeway so that if an employer chooses to extend coverage to the end of the month or year in which an adult child turns 26, the benefits still would not be taxable income to the employee.
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