Group health plans will soon be required to cover adult children until age 26 under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act”). The new requirement is effective for plan years beginning on and after September 23, 2010. Thankfully, agencies administering the Affordable Care Act have already issued guidance on the coverage requirements and tax implications of the adult child coverage mandate.
The Departments of Treasury, Labor, and Health and Human Services issued final interim regulations regarding the Affordable Care Act’s adult child coverage requirements on May 10, 2010. The regulations provide guidance on who must be offered coverage, describe the scope of the required coverage, and create new notice and special enrollment rights for adult children under age 26. Specifically, the regulations contain the following guidance.
- Eligible Dependents. Most plans only provide coverage to dependent children who satisfy the residency, support, and age requirements for tax dependent status. The Affordable Care Act requires a significant change in this practice. Effective for plan years beginning on or after September 23, 2010, plans may not condition any child’s eligibility for coverage on any factors other than the child’s age. A “child” for purposes of the coverage requirement is a participant’s son, daughter, stepchild, foster child, and adopted child. Factors that may not be used for defining eligible child dependents include: financial dependency on the participant, residency with the participant, student status, employment, and eligibility for other coverage. This represents a significant change to the way in which most plans define eligible dependents. Plans must be amended not only to provide coverage for children to age 26, but also to eliminate the impermissible factors for eligible dependent status.
- Uniformity of Coverage. Plans must provide uniform coverage to children under age 26. For example, a plan may not impose a premium surcharge on children over a certain age or limit the benefit packages available to children based on age.
- Marital Status. Plans must offer coverage to children under age 26 regardless of whether the child is married.
- Availability of Other Employer-Sponsored Coverage. Until January 1, 2014, plans in existence on March 23, 2010 (“grandfathered plans”) may exclude from coverage an adult child who is eligible to enroll in another employer-sponsored plan. A grandfathered plan may not exclude a child merely because the child is eligible to enroll in each parent’s employer-sponsored plan.
- Special Enrollment Opportunity. The regulations create a special enrollment opportunity and notice requirement that will impact open enrollment for the plan year beginning on or after September 23, 2010. A child under age 26 whose coverage ended, or who was denied coverage because the plan’s dependent coverage ended before the child attained the age of 26 must be provided at least 30 days to enroll in the plan. Accordingly, the special enrollment opportunity is extended to adult children under age 26 who, due to age or lack of tax dependent status, lost coverage, are on COBRA, or were never enrolled in the plan. Parents of such children also may elect coverage for themselves during the special enrollment period.
Coverage must be effective no later than the first day of the first plan year beginning on or after September 23, 2010. All benefit packages offered to minor children must be available to adult children.
The notice must be provided and the special enrollment period must begin no later than the first day of the first plan year beginning on or after September 23, 2010. Accordingly, it would be possible for an adult child to be enrolled retroactively if the enrollment period extends into the plan year beginning after September 23, 2010. For example, if the notice is provided on January 1, 2010 for a plan with a calendar year plan year, adult child coverage could be elected until at least January 30, 2010. The coverage would be effective as of January 1, 2010.
A plan sponsor may coordinate its general open enrollment with the new special enrollment right. For example, suppose a plan’s annual open enrollment period for the plan year beginning January 1, 2010 begins on October 1, 2010. The plan administrator could provide the adult child special enrollment notice no later than October 1, 2010 and allow a 30-day open enrollment period for all participants. By doing so, the plan administrator would not have to offer separate enrollment periods for adult children and all other participants and beneficiaries.
The IRS recently provided guidance regarding the tax aspects of the adult child coverage requirements. The Affordable Care Act excludes from taxation health plan coverage and reimbursements for an adult child who has not attained age 27 by the end of the year. The tax exclusion became effective on March 30, 2010. IRS Notice 2010-38 clarifies the following issues regarding the exclusion.
- Dependent Status. The exclusion applies regardless of whether the adult child satisfies any of the requirements for a tax dependent under the Internal Revenue Code. Notice 2010-38 provides that the exclusion would even apply to an adult child who is not employed by the plan sponsor, does not live with the covered employee, is employed by another employer that offers health coverage, and is married.
- Cafeteria Plan Qualified Benefit. Coverage provided to a child who has not attained age 27 may be purchased on a pretax basis through a cafeteria plan.
- Cafeteria Plan Mid-Year Election Change. If an employer elects to voluntarily offer the adult child coverage this year before it is required, employees may make a mid-year election to cover children up to age 27. The IRS will be issuing regulations regarding the mid-year election opportunity.
- Cafeteria Plan Amendments. If an employer elects to allow employees to purchase the adult child coverage through a cafeteria plan in 2010, the cafeteria plan must be amended by December 31, 2010.
- Employment Taxes. Coverage and reimbursements provided for an employee’s child under age 27 are not “wages” subject to taxes under the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA).
Plan sponsors need to act now to prepare for the new adult child coverage requirement. Plan documents and summary plan descriptions must be amended to provide for coverage of children up to age 26 regardless of any factors other than age and relationship to the participant. Whether and how the adult child special enrollment opportunity will be coordinated with the plan’s annual open enrollment must be determined. Notices must be prepared and issued no later than the first day of the first plan year beginning after September 23, 2010. If adult child coverage is voluntarily offered in 2010, health plan and cafeteria plan documents must be amended this year.
Additional regulations regarding the Affordable Care Act are expected in the near future. In particular, guidance on grandfathered plans may be issued this month.