On May 13, 2010, three government agencies¹ jointly issued an interim final rule implementing the requirement to provide dependent coverage to adult children until age 26 under the Patient Protection and Affordable Care Act (the “Affordable Care Act”), as amended by the Health Care and Education Reconciliation Act (the “Reconciliation Act”). The rule clarifies that coverage must be extended to an adult child irrespective of his or her tax-dependent status or prior enrollment in the plan and requires plans to administer a 30-day special enrollment period to facilitate the enrollment of children whose coverage previously terminated or who are newly eligible under the law. It follows the April 27, 2010, release of Notice 2010–38 by the Internal Revenue Service (“IRS”) regarding the favorable tax treatment of this coverage.
The interim final rule (for which comments are due by August 11, 2010) becomes effective on July 12, 2010. This article summarizes the new dependent coverage requirement under the Affordable Care Act and the recently issued guidance.
Background and Effective Dates
Enacted on March 23, 2010, the Affordable Care Act, as amended by the Reconciliation Act, requires group health plans and insurance issuers that provide dependent coverage of children to continue to make this coverage available for children until age 26, regardless of their marital status, beginning with the first plan year after September 23, 2010 (i.e., January 1, 2011, for calendar year plans). This coverage need not be offered to the child of a child receiving dependent coverage (i.e., a grandchild).
Effective Date for Grandfathered Plans
On March 30, 2010, the Reconciliation Act extended the adult child coverage requirement, along with a handful of other reform provisions, to “grandfathered health plans” (i.e., a group health plan or health insurance coverage in which an individual was enrolled on March 23, 2010)². The Reconciliation Act requires grandfathered health plans to continue coverage only for those adult children who are not eligible for other employer-sponsored health plan coverage beginning with the first plan year after September 23, 2010 (i.e., January 1, 2011 for calendar year plans)³. For plan years beginning after January 1, 2014, grandfathered health plans must make this coverage available to all eligible children regardless of whether they are eligible for other employer-sponsored coverage (such as through the adult child’s job).
Eligibility of Children Until Age 26
A number of issues regarding the scope of the new dependent coverage mandate immediately arose following the enactment of the Affordable Care Act, including whether plans had to cover the spouse of an adult child and whether plans could charge employees a higher premium for an adult child. The guidance provides these very important clarifications:
- Plans are not required to offer dependent coverage to the children of employees; but if they do, coverage must be provided to adult children in accordance with the Affordable Care Act, as amended. For example, for the plan year beginning January 1, 2011, a new plan that provides coverage for children will be required to extend coverage to the children of covered employees until they attain age 26. If a covered child turns 26 on July 17, 2011, the last day that the plan will be required to cover that child will be July 16, 2011.
- Compliance, including voluntary early compliance (i.e., prior to September 23, 2010), will not cause a group health plan or health insurance issuer to lose its “grandfathered health plan status” for any purpose under the Affordable Care Act, as amended.
- A plan’s definition of “dependent” for eligibility purposes may not take into consideration any factor other than the relationship between the child and the participant employee. As a consequence, dependent coverage cannot be conditioned on any of the following factors (or any combination thereof):
- Financial dependency on the participant or any other person
- Residency with the participant or with any other person
- Student, employment, or marital status
- Eligibility for other coverage (except for grandfathered plans prior to January 1, 2014)
Because plans commonly use these factors in their dependent eligibility requirements, plans must review and amend their definitions of “dependent” accordingly to comply with this new coverage mandate.
- A plan may not vary any of its terms on the basis of age (except for children who are age 26 or older). This means that plans cannot charge an additional premium surcharge for coverage provided to an adult child. Thus, the premium charged to an employee whose dependent children are over age 18 may not be higher than the premium charged to an employee whose dependent children are under age 18. In addition, a plan that offers two benefit package options to employees and their dependent children — an HMO option and an indemnity option — may not limit children who are older than age 18 to the HMO option.
- Coverage must be made available to children who are not currently covered by the plan (see “Special Enrollment” section, below). This means that a child who was never covered by a plan or whose coverage previously terminated (e.g., because the child attained the plan’s lower limiting age or ceased to be a full-time student) will be eligible to enroll in the plan, provided the child is under age 26. For example, employee A’s child Karla graduated from college in 2009 at age 22 and, as a consequence, ceased to be eligible for coverage under employee A’s plan. Employee A’s plan is a calendar year plan. Karla is eligible for coverage under employee A’s plan as of January 1, 2011. If employee A’s plan is a grandfathered health plan, Karla must not be eligible for other employer-sponsored coverage in order for her to enroll as of January 1, 2011.
- For plan years beginning before January 1, 2014, grandfathered health plans may only exclude an adult child under age 26 from coverage if the child is eligible to enroll in an employer-sponsored health plan other than a group health plan of a parent. For example, if the child is eligible for coverage through his or her job, the grandfathered plan will not be required to enroll the child for any plan year prior to January 1, 2014. Furthermore, if the plans of both parents offer dependent coverage, neither plan may exclude the adult child from coverage because the child may enroll in the plan of the other parent’s employer.
- Plans are not required to make coverage available to the spouse or child of the child receiving dependent coverage. This means that plans may exclude daughters-in-law, sons-in-law and grandchildren from coverage.
Transitional Rule Requiring a Special Enrollment Period for Children under Age 26
As referenced above, the interim final rule makes clear that plans must cover adult children under age 26 who previously lost coverage because they were too old under the terms of the plan (regardless of whether they elected COBRA continuation coverage) or who were never covered by the plan (e.g., because they were too old when their parents first participated in the plan). Plans must provide for a minimum 30-day special enrollment period so that employees may enroll these children and themselves, if not already enrolled. The enrollment period must begin not later than the first day of the first plan year beginning on or after September 23, 2010. Thus, plans may use their annual open enrollment period. For a calendar plan, the enrollment period may not be later than the period from January 1, 2011, through January 31, 2011. Coverage must commence as of the first day of the plan year. If a child is not enrolled during this special enrollment opportunity, the child may be enrolled during any of the normal enrollment opportunities available under the plan.
To facilitate enrollment, plans must provide employees with a written notice which states that children whose coverage ended, or who were denied coverage (or were not eligible for coverage) because the availability of dependent coverage of children ended before attainment of age 26, are eligible to enroll in the plan. This notice may be included with other usual enrollment materials as long as the aforementioned statement is prominent. These enrollees must be treated as “HIPAA Special Enrollees” — thus, they must be offered all of the benefit package options available under the plan and generally may not be required to pay more for this coverage. The interim final rule clarifies that any difference in benefits or cost-sharing requirements constitutes a different benefit package. Thus, a plan must permit an eligible employee to change from an HMO option to the indemnity option when he or she enrolls an adult child.
With respect to plans that voluntarily decide to continue coverage for adult children before coverage is required by the Affordable Care Act, the interim final rule clarifies the plan or issuer will not be required to extend this special enrollment opportunity to these adult children (e.g., children whose coverage is voluntarily continued instead of terminated following graduation from college in Spring 2010).
Favorable Tax Treatment
The Affordable Care Act amended the Internal Revenue Code (“Code”) to provide favorable tax treatment of dependent coverage of adult children under age 26. In Notice 2010–38, the IRS clarified that, as of March 30, 2010, this coverage will not be taxable to the employee under Code Sections 105(b) and 106 until the end of the year in which the child turns age 26. This means that a plan which continues coverage for an adult child through December 31st of the year in which the child turns 26 will not be required to impute the value of the coverage for any federal tax purposes.
Notice 2010–38 also clarifies that, effective as of March 30, 2010, employers may permit employees to immediately make pre-tax salary contributions towards this coverage under Code Section 125 cafeteria plans. Moreover, health flexible spending accounts and health reimbursement arrangements (“HRAs”) may reimburse eligible expenses that are incurred on or after March 30, 2010, by adult children who have not attained age 27 by the end of the year. The IRS specifically states that these changes may take effect as of March 30, 2010, provided the Section 125 cafeteria plan is retroactively amended not later than December 31, 2010.
The interim final rule is available on the DOL’s website.
More information on the Affordable Care Act, including a fact sheet on dependent coverage and FAQs, is available on the DOL’s website.
IRS Notice 2010-38 is also available online, on the IRS website.
If you have any questions regarding the extension of dependent coverage, please contact our office or the attorney with whom you normally work.
¹ The Department of Labor, the Department of Health and Human Services and the Internal Revenue Service.
² Please see our article from our March 2010 issue for further information.
³ We note that under the Affordable Care Act a separate “grandfather rule” applies to plans maintained pursuant to one or more collective bargaining agreements. While the Reconciliation Act imposed a number of reform provisions on grandfathered health plans, it did not address how they would apply to grandfathered collectively bargained health plans. Until guidance is issued regarding grandfathered health plans, it remains unclear whether the reform provisions will apply as of the same dates that apply to non-collectively bargained plans or as of the date on which the last of the collective bargaining agreements that relate to the plan terminates.