On June 11, UnitedHealth Group Inc. announced that it will continue to provide health care insurance coverage for insured participant’s children up to age 26. This coverage will continue regardless of the Supreme Court’s decision expected later this month on the Affordable Care Act. Later that day, Humana and Aetna confirmed that they would follow UnitedHealth Group and continue coverage for adult children. The provision of PPACA requiring this coverage is widely popular in opinion polls, even among individuals who do not support health care reform.
Employers with self-funded group health plans may wish to follow suit and promise to continue providing coverage for their employee’s adult children up to age 26. However, employers should note that this decision may have tax implications for the covered adult children. If PPACA is struck down, both the provisions requiring coverage of adult children up to age 26 and the provisions allowing that coverage to be free from federal taxes will disappear. While employers with self-funded group health plans could continue to cover adult children under their plans, this coverage would be taxable unless the children qualify as tax dependents of the employee. The tax treatment would revert to the rules that existed before PPACA, which generally means that children over the age of 19 must be able to show full-time student status in order to avoid taxation of their coverage. For those who could not show tax dependency, the employer would need to impute income for the value of the coverage, on the employee’s Form W-2.
Of course, it is highly likely there would be widespread clamor for a legislative fix for this issue – at least retroactively, and through the remainder of the 2012 plan year. However, until we know more, employers are well advised to proceed cautiously.