After nearly a decade of litigation and more than four years of study of a rule proposal, the EEOC on December 26, 2007, published a final regulation permitting the coordination of employer-provided retiree health benefits with Medicare and comparable state programs. (Click here for a copy.) As adopted, the regulation provides a narrow exemption from the Age Discrimination in Employment Act permitting employers to alter, reduce or eliminate health benefits (e.g., a “carve out” plan) for retirees eligible for Medicare or a comparable state health benefit plan, whether or not a particular retiree actually enrolls in that other benefit program. The regulation also permits the alteration, reduction or elimination of benefits for spouses or dependents of such retirees, whether or not the coverage provided for retirees is similarly modified. The exemption applies to both existing and newly created health programs, effective as of the date of publication. The regulation does not permit such coordination of benefits for active employees eligible for Medicare, nor does it permit coordination of retiree coverage with Medicaid.

On January 14, 2008, the Internal Revenue Service will publish additional guidance under Code section 152(d)(1) defining a “qualifying relative.” (Click here for a copy.) Although Notice 2008-5 does not specifically address employer-provided dependent health plan coverage, this new guidance appears relevant to the design of and tax treatment of those employer programs; the regulations under sections 105 and 106 specify that those statutory exclusions for the cost of and benefits under health plans or insurance provided by an employer (either by employer payments or by pre-tax employee contributions) extend to coverage for an employee’s “dependent” as defined in section 152.

Section 152(a), as amended by the Working Families Tax Relief Act of 2004, defines “dependent” to mean a “qualifying child” or a “qualifying relative.” Section 152 (d)(1)(D) limits that definition, however, by providing that an individual cannot be a “qualifying relative” of one taxpayer if he or she is the "qualifying child" of another taxpayer. This limitation had led to complexities in, for example, the case of a taxpayer who was supporting as members of his or her household two minor orphans who are brother and sister, or an unrelated friend and that friend’s child.

Notice 2008-5 clarifies that limitation, providing that an individual is not a qualifying child of “any other taxpayer” if the individual’s parent (or any other person with respect to whom the individual is defined as a qualifying child) is not required by section 6012 to file an income tax return and either:

  • does not file an income tax return, or
  • files an income tax return solely to obtain a refund of withheld income taxes.

The Notice provides three examples, and applies to taxable years beginning after 2004.