Dependent Coverage to Age 26
By Nancy Campbell, Amanda Hines and Eva Kerr
As we previously reported, the Patient Protection and Affordable Care (“PPACA”) and the Health Care and Education Reconciliation Act of 2010 (“HCERA”), require group health plans that provide dependent coverage to make such coverage available for children up to age 26 and give certain favorable tax treatment to such coverage.
On April 27, 2010, the Internal Revenue Service issued Notice 2010-38, which provides guidance on the tax treatment of coverage for children up to age 27. The rules set forth in Notice 2010-38 were effective March 30, 2010. On May 10, 2010, the Internal Revenue Service, Department of Labor, and Department of Health and Human Services, jointly released interim final rules, which provide guidance relating to dependent coverage of children up to age 26. These interim final rules are effective for plan years beginning on or after September 23, 2010 (i.e., January 1, 2011 for calendar year plans). This guidance and related action items are summarized below.
Age and Relationship Requirement
Currently, most group health plans condition dependent coverage on factors such as age, student status, residency and financial dependency. Under the new rule, a group health plan may no longer condition dependent child coverage on factors other than (1) age, and (2) the relationship between the participant and the child. Coverage may not be conditioned on whether the child is married, for example. The rule does not, however, require coverage of a child’s spouse or child (i.e., a participant’s grandchild).
Note that the rule does not define child. Accordingly, it remains unclear whether group health plans must make dependent child coverage available to a participant’s step-child, for example.
Illustration: A group health plan participant has one 25-year-old child who is married with one child. If the group health plan provides dependent coverage, it must cover the participant’s child but is not required to cover the participant’s child’s spouse or the participant’s grandchild.
The terms of a group health plan cannot vary based on age, except for children who are age 26 or older. For example, a group health plan may not impose an additional premium surcharge based on a child’s age nor may a group health plan limit access to a certain benefit package (e.g., an HMO) based on a child’s age.
Children whose coverage ended, who were denied coverage, or who were ineligible for coverage under a group health plan because of age must be afforded a special opportunity to enroll in a group health plan that continues for at least 30 days and with coverage effective not later than the first day of the first plan year beginning on or after September 23, 2010 (i.e., January 1, 2011 for calendar year plans). This special enrollment opportunity also requires that the child and the participant through whom the child is eligible for coverage under the plan (e.g., the parent) be offered the opportunity to enroll in all the benefit packages available to similarly situated individuals, as illustrated in Illustration 2, below.
Note that this 30-day special enrollment period will require employers to hold 30-day or longer open enrollment periods preceding the date they implement the rule. For example, if an employer implements the rule January 1, 2011, the open enrollment period for the 2011 calendar year will need to be 30 days or longer.
Employers must provide written notice of this special enrollment opportunity not later than the first day of the first plan year beginning on or after September 23, 2010 (i.e., January 1, 2011 for calendar year plans). This notice requirement is discussed in further detail in the section titled “Action Items,” below.
Illustration 1: Prior to 2011, a group health plan (with a calendar year plan year) allows participants’ children to be covered under the plan until the attainment of age 22. During the 2009 plan year, an individual with a 22-year-old child joins the plan. The child was denied coverage because the child is 22. The plan must provide the child, not later than January 1, 2011, an opportunity to enroll (including written notice) that continues for at least 30 days, with enrollment effective not later than January 1, 2011.
Illustration 2: A group health plan (with a plan year beginning October 1 and ending September 30) allows participants’ children to be covered under the plan until the attainment of age 22. Individual D and E, D’s child, are enrolled in the plan. During the plan year beginning October 1, 2008, E turns 22 and loses coverage under the plan. D also drops coverage. Not later than October 1, 2010, the plan must provide D and E an opportunity to enroll (including written notice) that continues for at least 30 days, with enrollment effective not later than October 1, 2010.
Illustration 3: Same facts as Illustration 2, except that E elected COBRA continuation coverage. Not later than October 1, 2010, the plan must provide D and E an opportunity to enroll other than as a COBRA qualified beneficiary (and must provide, by that date, written notice of the opportunity to enroll) that continues for at least 30 days, with enrollment effective not later than October 1, 2010.
The Department of Health and Human Services is encouraging employers and insurers to voluntarily implement these rules early. Some employers have voluntarily continued coverage for children who graduate or age off their parents’ coverage before this effective date. Surveys indicate that close to 75% of employers are choosing to wait until the effective date, however.
Employers considering early implementation of these rules must coordinate with the group health plan’s insurer or, if the group health plan is self-funded, its stop-loss carrier.
Application to Grandfathered Plans
Effective for plan years beginning on or after September 23, 2010 (i.e., January 1, 2011 for calendar year plans), grandfathered group health plans must provide coverage for participants’ children up to age 26 only if the child is not eligible to enroll in other employer provided coverage. Starting in 2014, grandfathered group health plans must provide coverage for children up to age 26, regardless of whether the child is eligible to enroll in other employer provided coverage.
Exclusion from Income
Currently, Code Sections 105(b) and 106 exclude from an employee’s gross income reimbursements received from and coverage under a group health plan. HCERA and Notice 2010-38 extend this favorable tax treatment to employees’ children who have not attained age 27 as of the end of the tax year. Notice 2010-38 defines child as the employee’s son, daughter, stepson, or stepdaughter, including legally adopted and foster children.
Illustration: A group health plan participant, B, has a son, C, who will attain age 26 on November 15, 2010. During the 2010 taxable year, C is not a full-time student. C has never worked for B’s employer. Because C will not attain age 27 during the 2010 taxable year, the coverage and reimbursements provided to him under the group health plan are excludible from B’s gross income under Sections 105(b) and 106 for the period on and after March 30, 2010 through November 15, 2010 (when C attains age 26 and loses coverage under the terms of the plan).
Application to Cafeteria Plans
Notice 2010-38 clarifies that a benefit will not fail to be a qualified benefit under a cafeteria plan (including a health flexible spending account) merely because it provides coverage or reimbursements that are excludible under Sections 105(b) and 106 for a child who has not attained age 27 as of the end of the employee’s taxable year.
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. However, a retroactive amendment to cover these individuals must be made not later than December 31, 2010 and must be effective retroactively to the first date in 2010 when employees are permitted to make pre-tax salary reduction contributions to cover children under age 27 (but in no event before March 30, 2010).
The Internal Revenue Service also intends to modify the cafeteria plan regulations to include change in status events affecting children under age 27 who are not dependents. These changes will be retroactive to March 30, 2010.
As previously reported in our November 2009 Employee Benefits Update, Michelle’s Law allows a college student with a “serious illness or injury” who is a covered dependent under a group health plan to continue group health plan coverage for up to one year while on a “medically necessary leave of absence.” Once effective, the new rules under PPACA and HCERA will render Michelle’s Law somewhat irrelevant because dependent coverage may no longer be conditioned on student status. If a group health plan provides dependent coverage to children age 26 and over, and conditions such coverage on student status, Michelle’s Law will continue to apply.
Group health plans must be amended, as applicable, to cover children up to age 26 and eliminate all other factors, such as whether the child is a student, married, financially dependent, or living with his parents.
Cafeteria plans may be amended to allow pre-tax salary reduction contributions for accident or health benefits under a cafeteria plan for children under age 27.
As described above, 30-day written notice of certain childrens’ opportunity to enroll must be provided not later than the first day of the first plan year beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans). The notice may be provided to the employees on behalf of their children and may be combined with other enrollment materials, provided the statement is prominent.
If necessary, extend open enrollment periods preceding the effective date to last 30 days or longer.
Coordinate early implementation of these rules with the group health plan’s insurer or, if the group health plan is self-funded, its stop-loss carrier.
If you have any questions on the subject of this article or would like more information, you may contact the authors or another Snell & Wilmer attorney at 602.382.6000.
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