Rules on adult child coverage defined

The government has just released clarifications for employers on health care reform and the rules will likely result in higher costs for employers. Just about a week after the IRS issued a notification that allowed adult child coverage to be available tax free, Health and Human Services, Labor and Treasury clarified the definition of adult children, as well as what employers can charge to provide extended coverage.

The Affordable Care Act requires employers to extend dependent insurance coverage to adult children, through age 26, for plan years that begin on or after September 23, 2010. For many plans, this is actually effective on January 1, 2011. Most health plans only allow adult child coverage up to ages 18 or 19 and then to age 22 or 23 if the child is a full-time college student. Under the new law, coverage is available whether or not adult children are still in school and even if they are married, unless they can get coverage through their own employer.

Under the newly issued regulations, employers are required to offer a special enrollment opportunity for this coverage. The open enrollment needs to be available for 30 days, regardless of whether the plan or coverage offers an open enrollment period. And, the enrollment and a written notice of it must happen before the first day of the first plan or policy year beginning on or after September 23, 2010.

In addition, employers must offer all of the benefit packages that would otherwise be available to qualified dependents at the same cost. Many employers were hoping to charge more for the extended coverage to help pay the cost of extending the benefit. Now, employers will absorb those costs, unless they choose to increase premiums for all or otherwise adjust coverage for all employees.

On April 27, the IRS issued a notification that allows tax-free adult child coverage, effective March 30, 2010. Upon passage of the Affordable Care Act, several large health insurers allowed immediate coverage, including Aetna, Blue Cross of Idaho, Cigna, and others. However, there was a concern that if employees signed up for the coverage before it was mandatory, they might have to pay taxes on it.

An FYI© issued by Buck Consultants instructs employers who are currently inputing income in these cases to immediately cease doing it for adult children who satisfy the new requirements and it advises employers they should consult with their payroll providers on how to address coverage provided since March 30. This issue primarily affects employees in states where there are already laws mandating coverage for adult children.

Further, Buck advises that in addition to premiums paid on health insurance, the favorable tax treatment will apply to dental and vision benefits, even if they do not have to be provided. In addition, the new treatment applies to reimbursements from health flexible spending accounts (FSAs) and health reimbursement accounts (HRAs).

Although not specifically mentioned, Buck believes health savings accounts (HSAs) are not included in the provisions at this time.

While the IRS notice answers an important tax question for employers, in many cases, it may actually raise more questions, such as whether or not an employer wants to begin providing such coverage immediately if they are not already doing so.

The White House issued a Fact Sheet on the issue explaining some of the actuarial reasons it believes such coverage is important: “Early enrollment will also enable young, overwhelmingly healthy people who will not engender large insurance costs to stay in the insurance pool.” But employers will have to weigh the costs of such coverage against this and other considerations, such as whether their workforce is demanding the extended benefit.

Employers can expect more employees will start asking about adult child coverage as word gets out that the government is permitting tax-free coverage immediately. Employers need to quickly examine this issue in order to decide the approach that makes the best business sense. Then, employers need to communicate their decision openly to their workforce. As I have mentioned in prior columns, employees care about health insurance reform and want to stay informed about how their company is responding.

Michelle Hicks is a communications consultant with Buck Consultants. Contact her at [email protected].