As mentioned in previous Client Alerts, the recently-enacted Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act of 2010 (together, the “Health Care Reform Legislation”), will have a major impact on individuals and employers for years to come. This is the first of a series of Client Alerts that will focus on specific areas of the Health Care Reform Legislation. This Client Alert focuses on the requirement that group health plans and health insurance issuers offer coverage to adult children up to age 26.
What the Health Care Reform Legislation Requires
The Health Care Reform Legislation does not require group health plans or health insurance issuers to provide health insurance coverage for dependents. However, if a group health plan or health insurance issuer offers group or individual health insurance coverage that provides dependent coverage, that plan or issuer must allow an adult child to continue coverage until the child turns age 26, regardless of student or marital status. That is, group health plan participants must have the option to cover their adult children up to age 26 regardless of whether such children are students or married.
It is important to note that the Health Care Reform Legislation does not require group health plans or health insurance issuers to make dependent coverage available to a child of a child receiving dependent coverage. Similarly, a spouse of a child receiving dependent coverage is not required to be offered such coverage.
The expanded dependent coverage requirement is effective for plan years beginning on or after September 23, 2010 (6 months after the date of enactment of the Health Care Reform Legislation). For calendar year plans, the effective date to begin offering this coverage will be January 1, 2011.
Application to Grandfathered Plans
If a group health plan was in existence on the date of enactment – March 23, 2010 – it is considered to be “grandfathered.” For grandfathered plans, dependent coverage does not need to be offered to adult children who are eligible to enroll in another employer-sponsored health plan for plan years beginning prior to January 1, 2014. Thus, existing group health plans may continue to exclude adult children if such children are eligible to enroll in another employer-sponsored health plan for any plan year beginning prior to January 1, 2014.
A separate tax provision in the Health Care Reform Legislation extends the employer-provided health coverage gross income exclusion to coverage for adult children up to age 27 as of the end of the tax year. Therefore, the value of any employer-provided health insurance for adult children up to age 27 is not imputed as income to the parent/employee.
Additionally, the cost of this coverage may be paid on a pre-tax basis through a cafeteria plan. Today, the IRS issued IRS Notice 2010-38 stating that, effective March 30, 2010, employers may permit employees to immediately make pre-tax salary reduction contributions for accident or health benefits under a cafeteria plan for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. The IRS noted that plan sponsors have until the end of 2010 to amend their cafeteria plan language to incorporate this change.
Next Steps for Employers
At this point, there are still many outstanding questions regarding how this dependent coverage should be administered, and regulations implementing this requirement are expected to be issued prior to September 2010. In the meantime, employers sponsoring group health plans – both fully-insured and self-insured – will need to prepare to communicate plan design changes resulting from the expanded dependent coverage requirement before and during the 2011 open enrollment period. In addition, group health plan documents and summary plan descriptions will need to be updated to reflect these changes.
For more information on the Health Care Reform Legislation, including the expanded dependent coverage requirement and/or if you have a suggestion about an area of the Health Care Reform Legislation that you would like to be covered in a future Client Alert, please contact your SGR Executive Compensation and Employee Benefits counsel.