Adult Children Coverage

Summary:

The Health Care Reform laws mandate that an employer must make group health coverage available to enrolled employees' dependents until age 26. The new law also removes the imputed income tax liability for employees whose children receive health care coverage beyond their 24th birthday and before age 27. The law does not require that "excepted" dental and vision benefits be extended to adult dependents, nor does it extend favorable tax treatment to excepted benefits that are extended to overage dependents.

Links to additional materials on this website:

• Health Care Reform: Age 26 Rule (Leavitt Bulletin, April 9, 2010) 
• Health Care Reform: Age 26 or Age 27, Two Different Rules (Leavitt Bulletin, May 10, 2010)
• Health Care Reform: Interim Final Rule, "Protecting Young Adults" (Leavitt Bulletin, May 4, 2010) 

Discussion:

Coverage of Adult Dependents
Effective Date. Health plans must begin covering eligible dependents to age 26 as of the first day of the Plan Year beginning on or after September 23, 2010 (six months after enactment).

Applicability. This provision applies to all group health plans, whether insured or self-insured, that were in existence when HCR was enacted as well as those plans that became effective subsequent to the date of enactment. It applies the same to grandfathered plans as to non-grandfathered plans.

Eligibility. Adult children under age 27 are eligible for coverage regardless of whether or not they meet the Tax Code definition of "dependent." They are eligible for coverage whether they are married or unmarried, live with their parent or not, regardless of earnings level or full-time student status, or are claimed on the employee's income tax return. A special limitation applies until 2014 to grandfathered group health plans: such plans are not required to enroll adult children over the age of 24 who are eligible to enroll in an employer-sponsored health plan through their own employment or that of their spouse.

Grandchild Exception. The new HCR rules do not mandate coverage availability for grandchildren.

Relief from Imputed Income Requirements
The new law also removes the imputed income tax requirements, so employers should not impute income for employer-provided health coverage to children over age 19 who do not meet the definition of qualifying child, which requires that they be full time students and living with the taxpayer (IRC Section 152(f)(1)). The relief applies to coverage provided or continuing to be provided after March 30, 2010. In contrast, coverage provided prior to March 30, 2010 is subject to imputed income if coverage was provided to individuals who do not qualify as Tax Code dependents. Note that whether before or after March 31, 2010, the cost of coverage is not subject to FICA or FUTA taxes. Technically, this new law applies to IRC Sections 105 (tax free benefits), 106 (non-taxable employer contributions), and 125 (cafeteria plans). By not amending IRC Section 152 (definition of dependents), Congress makes it clear that this imputed income exclusion only applies to group health plan coverage.

Cafeteria Plan Rules
The new law modifies cafeteria plan rules to permit pre-tax contributions for coverage applicable to over-age dependents and to permit tax free benefits for over-age dependents under a health care spending account.

For purposes of this new law, the coverage provided is tax free through December 31 (end of the taxpayer's tax year), for the year in which the participating dependent turns 27.

Cites to government guidance and the law itself:

Coverage of Children to Age 26: 75 Federal Register 27122 (May 13, 2010). Regulation, Fact Sheet and FAQs are accessible at: http://www.hhs.gov/ociio/regulations/dependent/index.html

Notice 2010-38, http://www.irs.gov/pub/irs-drop/n-10-38.pdf.