This installment of Hall Render's Health Law Broadcast series on health care reform is designed to provide you with the insight, analysis and practical suggestions with respect to the various reform initiatives that will affect your organization. 

HEALTH INSURANCE COVERAGE FOR ADULT CHILDREN:  IRS ISSUES FIRST GUIDANCE UNDER HEALTH CARE REFORM

The IRS recently issued Notice 2010-38 (the "Notice") to provide guidance on the tax treatment of health coverage for children up to age 27 under the Patient Protection and Affordable Care Act and its reconciliation-related amendments (referred to collectively as the "Act").

The Act states that if a group health plan provides coverage for dependent children, the plan must continue to make coverage available to an adult child until the child reaches age 26 (for plan years prior to January 1, 2014, the employer can exclude a child who has other employer-sponsored health coverage).  Further guidance is needed to define to whom coverage must be made available.   The Act amends section 105(b) of the Internal Revenue Code (the "Code"), with parallel amendments relating to retiree health accounts in pension plans, VEBAs and deductions by self-employed individuals for medical care insurance, to provide that the general exclusion from an employee's gross income for reimbursements for medical care to an employee's child extend to any employee's child who has not attained age 27 by the end of the taxable year. 

Although the Act only amended Code section 105(b), pertaining to reimbursements for medical care, the Notice makes clear that the exclusion from gross income will also apply to coverage under an employer-provided accident or health plan.  The IRS and Treasury will amend the regulations under Code section 106.

The Notice also states that the definition of adult child is determined under Code section §152(f)(1), which does not require the child to be the employee's dependent (e.g., there is no residency requirement, support requirement, or income threshold).  Code section 152(f)(1) provides that a child is an individual who is a:  son/daughter, stepson/stepdaughter, legally adopted child, child who is lawfully placed for legal adoption, or eligible foster child.  Employers can rely on an employee's representation as to the birthdate of the adult child.

With respect to health care flexible spending accounts ("FSAs") under Code section 125 cafeteria plans, the Notice clarifies that a health care FSA can reimburse expenses for a child under age 27 on a pre-tax basis.  The Department of Treasury will amend the change in status rules applicable to cafeteria plans, retroactive to March 30, 2010, to provide that becoming eligible for coverage, or remaining eligible for coverage beyond the date on which a child would have otherwise lost coverage, may be considered a change-in-status event.  If employers choose to implement this as a change in status event, participants who add an adult dependent to their coverage would be allowed to change (increase) their health care FSA contributions.  Employers who wish to cover expenses of dependent children under age 27 in 2010 will be permitted to retroactively amend their cafeteria plans to the first date in 2010 when employees are permitted to make pre-tax salary reduction contributions to cover children under age 27 (but not earlier than March 30, 2010).  These amendments must be adopted by December 31, 2010.

Please note that the provision of the Act requiring that group health plans cover adult children is not effective until the plan year beginning on or after September 23, 2010; however, the Notice is effective March 30, 2010.  Employers whose group health plans cover non-dependent adult children should stop imputing income for coverage provided to an adult child who will not attain age 27 by the end of 2010.  Additional amendments will be necessary to employers' group health plans and cafeteria plans to comply with the mandatory provisions of the Act.

As you review this information, please contact Tara Slone at (248) 457-7870 or your regular Hall Render attorney with any questions you may have.  We will issue additional Broadcasts as more guidance becomes available. 

Visit our Health Law Broadcast at hallrender.com/reform for a comprehensive listing of health care reform resources.  Also sign up for health care reform alerts and periodic updates as we continue to monitor this important issue.