Health Plan Coverage Extended to Adult Children

McGuireWoods Healthcare Reform Guide: Installment No. 5

May 13, 2010

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).

Application Date

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 described below.

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 Section 152(a).

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.

Transitional Rules

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 coverage.
  • 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 Plan Year.

Costs

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.

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