The Patient Protection and Affordable Care Act1 and Health Care and Education Reconciliation Act2 (together, the "Act") added the requirement that group health plans that cover dependents now cover them through the age of 26. In the first joint guidance issued from all three of the responsible government agencies, Interim Final Rules (the "Regulations")3 have clarified and applied the requirement. However, employers may be surprised by some of the details added by the Regulations.
Effective for plan years beginning after September 23, 2010, all group health plans that provide coverage for dependents of the employee will be required to extend coverage to children through the age of 26. Previously, the Treasury Department issued IRS Notice 2010-38, which would exclude this coverage from the employee's and dependent's taxable income for a broader period: from March 30, 2010, until the end of the year prior to the child reaching age 27. This broader period for the tax exclusion permits (but does not require) employers to implement this coverage earlier than the Act requires and to extend coverage to the end of the year that the child turns age 26, if they choose to do so for ease of administration or as an added benefit.
Clarifications and Additional Information
The new Regulations contain the following clarifications and additional information:
- If a plan offers dependent coverage, any child of any age—not just "adult children"—must be eligible for coverage without regard to whether the child is a "dependent," as defined by the Internal Revenue Code of 1986, as amended. No child can be required to be supported by the employee-parent, reside with the employee-parent, or be unmarried, as the child might have been under plan rules that were common under law prior to the Act.
- The terms of coverage—such as the amount of a premium or contribution charged, the choice of programs offered under a plan, etc.—cannot vary by age up through age 26. Thus, the premium charge for older children through age 26 cannot be higher than that charged for younger children. If coverage is provided beyond age 26, such as might be required for group insurance in New York State, a different premium may be charged for children older than 26.
- Grandfathered plans (that is, those in effect on March 23, 2010) can deny coverage prior to age 26 if the child is eligible for employer-provided coverage elsewhere (until plan years beginning January 1, 2014, or later, when the general rule applies to all plans). The Regulations clarify that this employer-provided coverage does not include coverage available through a parent.
- The Regulations include a special rule (the "Transition Rule") that requires all plans to allow any child who was not eligible for dependent coverage to enroll in the parent's plan up to age 26. The Transition Rule is effective for the first plan year that the age-26 rule first applies to the parent's plan, whether or not that child was previously enrolled in the parent's plan. The Transition Rule applies to a child who might have elected COBRA continuation coverage when the child "aged out" of the group plan under prior rules. Employers should be aware of the following Transition Rule requirements:
- If the parent is not enrolled when the child seeks to enroll for dependent coverage, the parent must be allowed to enroll as well.
- An enrolling child must have access to any benefit package offered to employees, even if that means allowing the parent to switch benefit packages.
- The child must be given at least a 30-day enrollment period following the sending of a notice of the availability of the dependent coverage. The Regulations allow the notice to go to the parent, relieving the plan of the burden of finding a separate address for the notice.
- Coverage must be effective as of the first day of the first plan year beginning after September 23, 2010, even if the child's request for coverage occurs later. After the expiration of the Transition Rule, normal rules for adding dependents can be applied.
- Even if a child previously received a COBRA continuation opportunity (such as by aging out under prior rules), the child will have a new opportunity to elect COBRA continuation coverage when the new coverage ends at age 26 (or a later age adopted by the plan).
- The Regulations do not specifically mention plans established after the March 23, 2010, effective date of the Act. However, it seems clear from the general rules that a new plan that offers dependent coverage would need to allow the enrollment of any dependents (using the new dependent definition) who are not yet age 26. The Transition Rule would not literally apply—there was no prior coverage for a dependent to be excluded from or to lose—but the net effect on the plan should be the same.
Implications for Plan Sponsors and Plan Administrators
Because the Regulations are effective at the start of the next plan or contract year (January 1, 2011, for arrangements operating on a calendar year), employers should review their programs now to allow a sufficient time to implement the new rules and do the following:
- Build the new "dependent child" rules into their next annual enrollment process and materials. Unsurprisingly, the new rules require that the new dependent medical coverage be prominently mentioned in annual enrollment materials, which can also serve as the required notice to the child.
- Consider realignment of the plan's coverage contribution structure to account for the cost of furnishing coverage to older "dependents." The requirement that all dependents be treated equally at ages below 26 means employers may need to consider changing the amount of the employee contribution for dependent coverage generally.
- Adjust "change in status" rules to allow both the parent and the child to shift coverage categories when a child under age 26 applies for coverage.
- For grandfathered plans, add a process to deny coverage to a child under age 26 with his or her own access to employer-provided plan coverage.