This is the fifth in a series of
WorkCite articles concerning the recently enacted Patient Protection
and Affordable Care Act and its companion bill, the Health Care and Education
Reconciliation Act of 2010 (referred to collectively as the Act).
Under the Act, group health plans and insurers that offer coverage for
dependent children must make that coverage available to certain adult children
until they reach age 26. On May 10, 2010, the IRS, DOL, and HHS jointly issued
interim final regulations (the Regulations) on the sections of the
Act that require group health plans to extend coverage to any
participant's child who has not attained age 26 (Adult Child).
The IRS has previously issued Notice 2010-38, which provides guidance on the
provision under the Act regarding favorable tax treatment of health coverage and
reimbursements for Adult Children (the Notice).
The Regulations will apply to plan years beginning on and after September 23,
2010 (e.g., January 1, 2011 for calendar plan years). We will refer to the first
year to which the Regulations apply as the Transition Plan Year. A
limited exception to the application date exists for grandfathered plans and is
Who Qualifies as an Adult Child?
Unlike the tax exclusion Notice, the Regulations define "child" in terms of
what a plan sponsor may not include in the definition. The Regulations simply
provide that the plan sponsor must limit the definition of “child” to “the
relationship between the child and the participant” and may not include any of
the factors that are often associated with dependent status: financial
dependency, residency, student status, or employment.
Comment: It is noteworthy that the Regulations fail to incorporate
the same definition of “child” used in the tax exclusion Notice. The
Notice’s definition covers the son, daughter, stepson, or stepdaughter of
the employee, including an individual who is legally adopted by the
employee, an individual who is lawfully placed with the employee for legal
adoption by the employee, and an eligible foster child. It would be helpful
if the final regulations incorporated the same definition for both purposes.
An Adult Child is a "child" who has not attained age 26.
Therefore, both the coverage requirement and the exclusion of the health
coverage from gross income will apply to an Adult Child of the employee even if
the Adult Child is not the employee's dependent within the meaning of Code
What Coverage Must Be Provided to Adult Children?
The Regulations provide that the terms of the group health plan cannot be
varied for children based on their age. Therefore, coverage may not be
restricted in a manner that applies solely to Adult Children.
Adult Children (and their parents) are treated as “special enrollees” under
HIPAA. This means that they must have access to all of the benefit packages
under the plan that are available to “similarly situated individuals who did not
lose coverage by reason of cessation of dependent status.”
May the Plan Charge More for Covering Adult Children?
Generally, no. In keeping with the theory that the terms of the plan cannot
vary for Adult Children, the Regulations provide that an additional premium may
not be charged for covering an Adult Child if the same amount would not be
charged for covering a child who is not an Adult Child. For example, a plan
could not charge an additional $100 per month where the charge is assessed only
when an Adult Child is added to coverage. But, where premiums increase based on
the number of covered family members, the addition of an Adult Child could
result in a permissible increase because the same increase would apply to
coverage of a non-Adult Child.
Special Rule for Grandfathered Plans
If a group health plan was in existence on the Act’s enactment date (March
23, 2010), it is “grandfathered” for purposes of the Act. A grandfathered group
health plan may exclude an Adult Child who is eligible to enroll in another
eligible employer-sponsored health plan, as long as the other plan is not a plan
that covers the Adult Child’s parent. This exception will remain in effect for
all plan years beginning before January 1, 2014, provided that the plan remains
grandfathered during that period. For plan years beginning on and after January
1, 2014, the exception will no longer apply to grandfathered plans.
The agencies have not yet published substantive guidance on grandfathered
plans, including how that status might be lost. The agencies did magnanimously
note in the Regulations that plan amendments required to conform to the Adult
Child coverage rules will not cause a plan to lose grandfathered status.
The Regulations recognize that many Adult Children who are not currently
eligible to participate in their parent’s plan will become eligible later in
2010 or in 2011. The right to coverage will apply in the following situations if
the Adult Child becomes eligible for coverage under the plan on the first day of
the Transition Plan Year:
- An Adult Child has previously aged out of a plan and dropped coverage.
- An Adult Child has previously aged out of a plan and elected COBRA
- An Adult Child has dropped out of a plan for another reason and was not
eligible for COBRA coverage.
Except as described below, coverage need not be retroactive.
Required Notice and Timing
With respect to Adult Children who meet the transition rules, the plan must
provide written notice and the opportunity to enroll that continues for at least
30 days. The notice and enrollment right must be provided prior to the first day
of the Transition Plan Year.
If the notice is provided at least 30 days prior to the beginning of the
Transition Plan Year, coverage (if elected) will become effective on that date.
However, where the notice is provided less than 30 days prior to the beginning
of the Transition Plan Year and the Adult Child elects coverage after such date
but before the end of the 30-day election period, coverage must be effective
retroactive to the beginning of the Transition Plan Year.
Comment: Because the Regulations specifically permit the notice to
be included with other plan enrollment materials (as long as the notice is
“prominent”), plan sponsors should make every effort to modify their plan
enrollment materials to comply with the requirements of the Regulation to
avoid the need to add Adult Children retroactively during the Transition
Increasing the number of individuals covered by a plan will invariably
increase the cost of sponsoring a plan, even where the newly eligible
individuals are Adult Children. HHS has provided several estimates of the
additional costs that plans and participants will need to absorb. Under the
mid-range estimate, the cost of family premiums is expected to increase 0.7% in
2011, 1.0% in 2012, and 1.0% in 2013. This does not take into account other cost
increases associated with the Act.
The Regulations represent the first published effort by the three agencies
(IRS, DOL and HHS) to provide joint guidance regarding the Act’s plan mandates.
We expect many such projects to follow in the near future, and we will provide
analysis in future WorkCites.
Visit the Healthcare
Reform section for additional updates and resources.