Under federal health reform, an employee’s child can remain enrolled as a dependent until he or she reaches age 26. The sub-rules and nuances of the rule explained below. Federal tax changes allow tax-favored treatment of coverage costs until the child reaches age 27 (rather than age 26). New interim final regulations published May 10, 2010, require a 30-day election period following a special notice. Practical implications and actions steps provided below can guide a group health plan sponsor’s strategy.
The new rule only applies to a plan otherwise offering dependent child coverage. A plan that only provides employee-only, or employee and spouse only, coverage will not need to comply with the new rule.
The change is effective for a plan as of its first plan year on or after October 1, 2010. The effective date will correspond to a new plan year, which is also the date employees generally are allowed to re-enroll. (See below for the practical effect on the enrollment process just prior to the plan’s effective date.) The change for a plan with an October, November, or December plan year will be effective as of the first day of that month in 2010. Plans with plan years starting with January through September must comply with this change effective as of the first day of that month in 2011.
Many employees are asking if they can enroll their children, in the spring and summer of 2010. These children may have lost coverage for various reasons, or perhaps were never enrolled, and are under age 26. The response is generally going to be, “No.” As discussed below, a 30-day open enrollment period just prior to the plan’s effective date generally will be the time when an employee will re-enroll or enroll a child. The law does not require a plan to add these children to the plan before then. A group health plan can, and should, require a completed election form to add an adult child to the plan or to allow an adult child to rejoin the plan.
Insurance Carrier Reactions
As of May 2010, many insurance carriers and third-party administrators are announcing they will allow children to remain on group health plans past the usual limiting age up to age 26 (even if the child is not in school and even if the child gets married), provided the children are enrolled in the plan on June 1, 2010. (June 1 is the most common date carriers have selected.) Carriers want to lessen administrative efforts and prevent a gap for children graduating this spring, so this is a “stop-gap” measure. Otherwise, these children would lose coverage between either the date of graduation, the date of loss of coverage due to reaching the limiting age, or the date of another loss of coverage event and the date the law takes effect.
Early implementation results in piecemeal implementation. Children who already lost coverage prior to the date the carrier has selected usually will not benefit from the carrier or TPA implementing the law early. Until the actual effective date, an employee whose son or daughter who lost coverage prior to June 1 generally will not be able to enroll that child in the health plan.
An employer typically will have a choice about making this plan change early. A plan sponsor is not required by law to do so, and may choose not to, especially if self-funded. Many plan sponsors prefer to delay compliance due to cost. Early compliance also will not eliminate the new notice and 30-day election period discussed below.
Some carriers implementing the law early may not allow smaller, fully-insured employers to decide whether or not to come into compliance early. The carrier may simply require all small groups to apply the stop-gap measure.
Adult Children Eligible for Coverage
A plan sponsor must change its previously-held concepts of covered dependent children. Any child can remain covered until age 26, even if the child is living away from home or is married, even if the child is not a student, and even if the child is working. The law does not require coverage of the spouse (or of any child) of such an adult child. If the adult child is female and is covered under the plan at the time of pregnancy and delivery, the expenses for the mother for maternity care and childbirth would be covered. The new baby (the employee’s grandchild) would not be eligible for coverage under the group health plan as a result of the new law.
Changes to IRS Tax Rules
Group Health Plans: Plan sponsors have been confused by changes to the taxation of health plan coverage for adult children. Federal tax rules were revised as of March 30, 2010, to allow pre-tax treatment of premiums and coverage for adult children. The tax rule is somewhat different, however, and is a source for confusion. The tax law allows an employee to provide pre-tax coverage for an adult child until that child reaches age 27 (not until age 26, as the adult child eligibility rule provides). These ages simply do not match in the new law. The rules are easier to understand if you consider their impact:
- The change in the health care law will require group health plans to cover children under the plan until the child turns age 26, if the plan offers dependent coverage.
- The new tax law would allow parents to cover their children on a pre-tax basis up to age 27, if their employer’s group health plan allows for children to be covered until that age. The plan is not required to do so.
Flex Plans: The tax rule change affects employers to offer health flexible spending accounts (Health FSAs). Under the new tax rules, a Health FSA may reimburse claims for a dependent child until that child reaches age 27. A plan is not required to do so; the plan could only reimburse claims up to the date the child turns age 26.
Special Notice and Election Period
Regulations require each plan sponsor to notify all eligible employees of their right to enroll any children up to age 26 in group health plan coverage, even if the employee is not currently enrolled, and even if the child was not previously enrolled in the plan. The notice is due no later than the first day of the first plan year on or after October 1, 2010. As discussed below, due to annual enrollment periods and a 30-day election period following the notice, most plan sponsors will provide the notice prior to that date.
The notice can be provided in a number of ways: by electronic disclosure, if the plan satisfies DOL requirements under ERISA for this method, by including the information in enrollment materials, or by mailing the notice to each employee’s last known address by U.S. postal service first class mail. If the notice is included with enrollment materials, the notice must be “prominent.”
The plan sponsor must allow a 30-day enrollment period following the distribution of the notice during which time the employee may choose to enroll the child as well as himself if not currently enrolled in the plan. If the notice is provided just over 30 days prior to the effective date of the new rule, the election would have to be made just prior to the effective date of the new rule, which in turn will generally correspond to a new plan year. However, if the notice is provided, for example, just two weeks before the effective date of this rule, the employee could elect coverage during a 30-day period which would end after the start of the new plan year and after the effective date of the rule. In that situation, coverage elected for the child (and employee) must be made effective retroactively as of the start of that plan year.
Benefit Options Made Available: The child (and the employee through whom the child enrolls) must be offered all the benefit packages available to similarly situated individuals who did not lose coverage by reason of cessation of dependent status.
No Premium Surcharges or Other Different Terms: The plan providing dependent coverage cannot vary its terms (including cost and available benefits) based on age (except for children who are age 26 or older). The child simply cannot be required to pay more for coverage than any other child of any age, regardless of any prior loss of coverage. Wording in the health reform law itself suggested an employer might charge a higher premium for children over a certain age; the new regulations strictly forbid such a surcharge.
Rights of COBRA Qualified Beneficiaries
Children who are covered by COBRA will have the right to enroll in the plan with the employee, provided the child has not yet reached age 26. As a result, some children will switch from COBRA status back to coverage through an active employee.
The law does not address children of persons covered by COBRA, such as children of a former employee on COBRA. Such a former employee should have the same rights as a similarly situated active employee to add children up to age 26. It is suggested that the notice and 30-day election period explained above be provided to persons on COBRA, in addition to active employees eligible for coverage under the plan.
Plan Changes Required When Effective
Group health plan sponsors will need to take the following steps when the law takes effect:
- Amend plan documents to allow coverage of adult children until the date the child turns age 26 and to remove conflicting provisions (such as rules on student and marital status).
- Revise plan summaries (if separate from plan documents) in a similar manner.
- Revise cafeteria plan provisions to allow pre-tax premium payment until coverage ends when the child reaches age 26.
- Consider Health FSA plan changes to allow pre-tax reimbursement of adult children medical expenses up to age 27 if the plan allows for coverage beyond age 26.
- Revise election forms, enrollment guides, and other annual or new hire election materials.
- Provide a 30-day election period following a special notice on this issue, to be provided to all eligible employees before the first day of the first plan year on or after October 1, 2010.
- Enroll a child (and the employee enrolling with the child) who elects coverage pursuant to the new law on the effective date of the rule, allowing them to select any benefit option available to similarly situated persons, and at the same premium cost applicable to other dependents.
- Confirm the insurance carrier or TPA has changed its systems to address the new triggering age.
- Confirm COBRA administration will correspond to legal and plan changes.
Plan Sponsor Planning Opportunities
Opportunities to reduce costs in the face of this plan change are few, but are worth considering:
- A group health plan could be re-written to eliminate coverage for children of an employee. (Plan sponsors are not likely to make such changes.)
— After the employer mandate is effective in 2014, dependent coverage apparently must be offered for spouses and dependents of all full-time employees, so eliminating dependent coverage to avoid adult child coverage is not a “sustainable” plan change under health reform.
- Determine whether the plan will be considered “grandfathered.”
— If so, consider imposing a condition that the child can only enroll if not eligible for group health plan coverage through his own employer.
— This rule can only be grandfathered until the first plan year on or after January 1, 2014. After that date, an adult child’s eligibility for benefits through his own work cannot be considered.
- Determine if the insurance carrier or TPA offers early implementation and decide whether to use a stop-gap measure to prevent a loss of coverage prior to the effective date of the age 26 rule