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Dependent Coverage Requirements (and Options)

Under the Affordable Care Act, group health plans providing coverage to dependent children will soon be required to make coverage available to a covered employee’s adult child until the child’s 26th birthday, even if the child is no longer a full-time student and even if the child can no longer be claimed as the employee’s “dependent” on the employee’s federal income tax return. This requirement to extend group health plan coverage until an adult child’s 26th birthday applies to both insured and self-insured plans (regardless of the plan’s status as a “grandfathered” plan), and is effective for plan years beginning after September 23, 2010 (i.e., January 1, 2011, for calendar-year plans).

The Act also makes a conforming change to the Tax Code so that coverage and/or reimbursements for such adult children will not be included in the employee’s gross income for federal income tax purposes. Although the requirement to extend group health coverage to adult children is not effective for many plans until 2011, the exclusion from income is already effective. It applies to coverage provided (or reimbursements of expenses incurred) on or after March 30, 2010.

As a result, plans that are already providing coverage to nondependent children under age 26 (either voluntarily or pursuant to a state law that requires insured plans to cover children to a later age) need not report the value of this coverage as taxable income for periods beginning on or after March 30, 2010. In addition, plans that voluntarily elect to comply with the new coverage requirement before 2011 may do so without adverse tax consequences to their employees (or additional reporting requirements by the plan sponsor).

Together, these two changes provide some significant new obligations (and opportunities) for sponsors of group health plans, health flexible spending accounts (“FSAs”), and health reimbursement accounts (“HRAs”). Fortunately, both the IRS and the DOL have already issued substantive guidance in this area, easing the task of complying with these new rules.


The Act provides that any group health plan or health insurance issuer offering group or individual health insurance coverage for dependent children “must continue to make such coverage available for an adult child until the child turns 26 years of age.” The Act specifically states, however, that a plan need not make coverage available to a child of a child receiving dependent coverage (i.e., an employee’s grandchild). The DOL regulations make clear that a plan need not cover the spouse of an adult child, either.

As noted above, the requirement to extend group health coverage to adult children until their 26th birthday applies for plan years beginning on or after September 23, 2010. This means that most plans must offer this coverage beginning with the 2011 plan year. However, for plan years beginning before 2014, “grandfathered” plans (generally, those in existence on March 23, 2010) need not extend coverage to an adult child who is eligible for coverage under another group health plan – disregarding any coverage available to the child under a plan of the other parent’s employer.

The DOL regulations address other key points, as well. For instance, the coverage provided to adult children under age 26 must be no less favorable than the coverage provided to other dependent children. This means that adult children may not be charged a higher premium than younger children, and they must be offered the same range of benefit options. An example in the regulations makes clear, however, that a plan charging an additional premium for each covered dependent may increase the total premium to reflect the coverage of an adult child.

Second, all plans that cover dependent children will be required to offer a one-time open-enrollment opportunity for children under age 26 — even if the plan normally offers no open-enrollment period. This open-enrollment period must begin no later than the first day of the first plan year to which this change applies, and it must remain open for at least 30 days. Notice of this open-enrollment opportunity that is provided to an employee will be considered sufficient notice to the employee’s adult child. If a child chooses to take advantage of this open-enrollment opportunity, his or her coverage must be effective as of the first day of the first plan year beginning after September 23, 2010. Finally, the DOL regulations make clear that this one-time enrollment opportunity must be treated as a “special enrollment” under HIPAA. This may have some surprising consequences. For instance, if a child qualifies for this open enrollment opportunity, but his or her parent is not currently enrolled in the plan, the plan must provide an opportunity for both the parent and the child to enroll. Moreover, an adult child’s enrollment may serve as an opportunity for his or her parent to change to a different benefit option. These alternatives should be explained in the notice that is required to be provided concerning this one-time enrollment opportunity.


Separately, the Act amends Section 105(b) of the Tax Code, the provision under which employees are allowed to exclude from their taxable income any benefits they receive under an employer-sponsored health plan. Prior to this amendment, the exclusion from income under Section 105(b) applied only to medical benefits received by an employee, the employee’s spouse, and the employee’s “dependents” (as defined in Code Section 152). Under Section 152, a taxpayer’s child will not qualify as a “dependent” unless the child (i) lived with the taxpayer for more than half of the year, (ii) did not provide over half of his or her own support for the year, and (iii) was either less than 19 for the entire year, or was a student who was less than 24 for the entire year.

The Act amends Section 105(b) to provide that the exclusion also applies to benefits received by an employee’s “child” (as defined in Code Section 152(f)(1)) who, as of the end of the taxable year, has not yet attained age 27. Accordingly, the expanded income exclusion applies to any child, step-child, adopted child, or foster child who will not attain age 27 by the end of the year regardless of the child’s marital status, and regardless of whether the child meets the residency or support requirements to qualify as the employee’s “dependent” for federal income tax purposes.

Note that the Act does not change the definition of “dependent” under Section 152, and therefore does not allow a taxpayer to claim an older child as a dependent for federal income tax purposes. It merely expands the category of individuals for whom medical expenses may be reimbursed without causing an employee to be taxed on those reimbursements.

According to the Act’s legislative history, the Act also excludes from an employee’s taxable income (under Code Section 106) the value of employer-provided health care coverage provided to the employee’s adult children. Therefore, if an employer pays the premiums for its employees’ adult children, those employees will no longer be taxed on those premiums. Moreover, an employer may now allow its employees to pay such premiums on a pre-tax basis (through a Section 125 cafeteria plan).


There are some key differences between the two aspects of this change. First, the coverage mandate does not apply until the first plan year beginning on or after September 23, 2010, while the expansion of the income tax exclusion became effective on March 30, 2010. As a result, there is a period (between March 30, 2010, and the first day of the plan year that begins after September 23, 2010) in which plans have the “option” to extend coverage to adult children without causing the employee to incur additional taxable income. (Interestingly, Kathleen Sebelius, the Secretary of HHS, has already published a letter asking employers and insurers to voluntarily offer dependent health coverage through age 26 starting in May of 2010, when many college graduates will otherwise lose coverage, and several key health insurers have already agreed to do so.)

Second, the coverage mandate applies until an “adult child” attains age 26 (i.e., until the child’s 26th birthday), whereas the income tax exclusion applies to reimbursements (or coverage) provided to any child who has not yet attained age 27 by the last day of the calendar year. Therefore, although plans are only required to offer coverage until the child attains age 26, such coverage may be provided — on a tax-free basis — until the end of the year in which the child attains age 26.


The IRS has already issued guidance regarding the expansion of this tax exclusion. Notice 2010-38 makes clear that:

  • The exclusion from income applies to both reimbursements of health care expenses (under Section 105(b)) and the cost of employer-provided coverage (under Section 106); 

  • The exclusion for reimbursements of medical expenses also applies to health FSAs and HRAs; and 

  • Non-taxable coverage and reimbursements are also excluded from “wages” for purposes of FICA and FUTA taxes.

The Notice also includes some significant pronouncements with respect to Section 125 cafeteria plans and health FSAs. For instance, it provides a special “transition rule,” whereby employers may permit their employees to immediately begin making pre-tax salary reduction contributions for health coverage through a cafeteria plan (i.e., to pay premiums for health coverage or to set aside dollars in a health FSA) for adult children under age 27, even if the plan has not yet been amended to cover those individuals. To take advantage of this rule, however, the employer must amend the plan to cover such adult children by December 31, 2010, and the amendment must be retroactively effective as of the first date that employees were permitted to make pre-tax salary reduction contributions on behalf of such children.

Second, the Notice states that the IRS intends to amend the Section 125 cafeteria plan regulations (effective as of March 30, 2010) to permit employees to make mid-year election changes on account of “change-in-status” events affecting nondependent children under age 27. Under the amended rules, an employee will be permitted to change premium conversion elections (or health FSA elections) if either (i) an adult child becomes newly eligible for coverage, or (ii) an adult child becomes eligible for coverage beyond the date on which the child otherwise would have lost coverage.


Although group health plans that provide dependent coverage have until the first plan year that begins after September 23, 2010, in which to extend coverage through a child’s 26th birthday, plan sponsors should immediately consider the following questions:

  • Should we extend group health coverage to adult children now, or should we wait until we are required to do so (in the first plan year after September 23, 2010)?

  • If we voluntarily extend this coverage now, should this apply to all children under age 26, or only those who are still in school?

  • If we extend this coverage now, will our stop-loss insurance carrier cover any catastrophic claims incurred by an adult child? And will our stop-loss insurance premiums increase as a result of this change?

  • Should we amend our Section 125 plan to allow for health plan premiums on behalf of adult children to be paid on a pre-tax basis?

  • Should we amend our Section 125 plan to allow for FSA reimbursements on behalf of such adult children?

  • Should we allow employees to change their FSA contribution elections when an adult child becomes eligible for coverage under our group health plan?