The recently enacted Patient Protection and Affordable Care Act, as amended by the 2010 Health Care Reconciliation Act (together, the “Health Care Reform Acts”), imposes a new requirement on group health plans that provide for coverage of dependents of a covered individual. The Health Care Reform Acts require that such plans must extend such dependent coverage to children of a covered individual until the child reaches 26 years of age. This coverage requirement is unrelated to the status of the child as an employee’s tax dependent. Currently the requirement is scheduled to become effective for group health plan years beginning on or after September 23, 2010, although prior to 2014 certain grandfathered plans are required to extend this adult child coverage only if the child is not eligible for health coverage through his or her employer. More information is available here.
In connection with this new requirement, the Health Care Reform Acts have amended the Internal Revenue Code to provide that employer coverage of a child of an employee in a qualifying group health plan may be provided on a tax-free basis until the end of the tax year in which the child attains age 27, even if the child is not a tax dependent of the employee. For this purpose, “child” is defined broadly to include an employee’s son, daughter, stepson, stepdaughter, legally adopted child or foster child placed with the employee by court order. The amendments to the Internal Revenue Code became effective March 30, 2010; after that date, federal income tax should no longer be imputed by an employer on the value of coverage to an employee’s child who has not attained age 27 by the end of the tax year. (The imputed income rules continue to apply through March 30, 2010.)
Massachusetts law already requires extended coverage of children for two years following loss of tax dependent status, or age 26, if earlier, for any insured group health plan that provides dependent coverage. The value of employer-provided extended coverage for employees’ non-tax dependent children mandated by law is not subject to Massachusetts income tax. Employers operating in states other than Massachusetts should consult tax advisors in their states of operation to determine if employees will be subject to state income tax in connection with the extension of coverage to non-tax dependent children.Finally, the Internal Revenue Service recently published guidance permitting employers to allow employees to make mid-year changes to their Section 125 pre-tax elections to take advantage of this opportunity to cover adult children in their employer’s plan. Such enrollment is permitted for any period of coverage beginning on or after March 30, 2010, as long as the employer’s cafeteria plan document is amended retroactively to provide for such coverage by the end of the 2010 plan year for the cafeteria plan.