This article originally appeared in the Pennsylvania Family Lawyer, Volume 32 Issue No. 4 (December 2010).

INTRODUCTION

The Patient Protection and Affordable Care Act (P.L. 111-148), as amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), combined, make up the law commonly referred to as Health Care Reform. This article refers to Health Care Reform as the Affordable Care Act or the ACA.

The ACA amended the Public Health Service Act (PHSA). New group health care plan "mandates" appear in Title XXVII, Part A, Individual and Group Market Reforms, Subpart II, entitled "Improving Coverage." Generally, the provisions of Subpart II, Part A, Title XXVII of the PHSA have been incorporated by reference into the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Internal Revenue Code of 1986, as amended (Code).

Most of the ACA guidance to date has been issued in the form of Interim Final Regulations issued jointly by three separate agencies: Health and Human Services (HHS), the Internal Revenue Service (IRS) and the Department of Labor (DOL). However, some guidance has taken the form of sub-regulatory guidance as well as "Frequently Asked Questions" (FAQs). (HHS, IRS and DOL may be referred to, collectively, as the "Agencies".)

Although many of the provisions of the ACA are phased in over a number of years, this article focuses primarily on the adult child mandate effective the first day of the first plan year beginning or after Sept. 23, 2010. For group health care plans that are maintained on a calendar year basis this is generally, Jan. 1, 2011. Individual policies of health care insurance must also comply with the adult child mandate in 2014.

During the Congressional debate over Health Care Reform in early 2010 many of us heard: "if you like the health care coverage you have, you can keep it." This goes to the "grandfathered" concept. If an employer maintained a group health care plan (GHP) on March 23, 2010, it is considered a "grandfathered plan." If the employer makes no changes to the plan that removes the plan from "grandfathered" status, the plan is exempt from some, but not all of The ACA's GHP mandates, or the mandates may apply somewhat differently. New plans and plans that lose their grandfathered status must comply with all ACA GHP mandates. Both grandfathered and non-grandfathered plans must comply with the adult child mandate discussed below; however, a grandfathered plan is not required to provide the coverage if the adult child has access to other employer-provided group health coverage (other than a plan of the child's parent). In 2014, grandfathered plans must offer coverage to otherwise eligible adult children even if they are eligible to participate in another employer-provided plan.

Background

Many GHPs that offer dependent coverage are already required to cover some adult children under state law mandates and/or state laws requiring continued health care coverage as well as under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (COBRA).

A. State Law Mandates Applicable to Fully-Insured Plans

In many states, fully-insured GHPs are already required to provide coverage to older children of eligible employees. In Pennsylvania, for example, Act 4 of 2009 requires each insurer that issues a policy in Pennsylvania offer the employer the right to include adult child coverage in the policy. In Pennsylvania, the adult child coverage is to age 29 and extends only to children who are not married, have no dependents and have no other coverage. An additional premium can be charged for this coverage and the adult child must be either a full-time student or a resident of Pennsylvania. The state law adult child eligibility requirements and outside age limitations vary from state to state.

B. Continuation Coverage for Older Children Required by COBRA

While state law mandates have required fully-insured plans to extend coverage to adult children, so has continuation coverage under the COBRA The requirement to provide COBRA coverage to children who "age out" of a plan or no longer meet the Code's definition of "dependent" applies to both fully-insured plans and plans that are self-insured by the employer. Under COBRA, however, the adult child (or the parent) would be required to pay the entire cost of coverage plus an administrative fee. COBRA coverage will still be there, and can be elected, even when a child is no longer eligible for coverage under the new ACA adult child mandate discussed in more detail below.

The Adult Child Mandate under the ACA

Under the ACA, a plan (both insured and self-insured) that offers dependent coverage must also offer coverage to an employee's child until the child turns age 26. This mandate is contained in amendments to the PHSA (new § 2714), but is incorporated by reference into § 9815 of the Internal Revenue Code and § 715 of ERISA.

The requirement to cover adult dependents is, generally, effective for plan years beginning on or after Sept. 23, 2010. (However, the HHS secretary convinced many insurance carriers to offer this coverage under their policies in 2010 in order for parents to cover their adult children who were, for example, graduating from college.) Plans maintained on a calendar year basis (and that offer dependent coverage) must provide the mandated adult child coverage effective Jan. 1, 2011. Interim Final Regulations were issued by the Agencies on May 14, 2010 (May 14, 2010 Rules) that provide guidance on the adult child mandate.

A plan cannot impose any conditions on a child's eligibility except to specify how the child must be related to the employee-participant. For example, a plan may specify that it only covers natural children (including adopted and placed for adoption) but not any other children. But a plan may not impose any other condition on the child's eligibility, such as a requirement to be financially dependent on or reside with the participant or be enrolled full time in school. While coverage must be extended even to a married adult child under age 26, coverage does not have to be extended to a spouse or child of the eligible adult (i.e., grandchildren).

According to FAQs about the ACA issued by the DOL (See Q&A 14 at www.dol.gov/ebse/faqs/faq-aca.htntl) plans may limit age 26 coverage to those dependents covered the plan who are related to the employee-participant in the ways described in Internal Revenue Code § 152(1)(1). Those relationships include a son or daughter, stepson or stepdaughter of the employee (including such persons that are legally adopted by or lawfully placed with the employee for legal adoption) and an eligible foster child. "Eligible foster child" means an individual who is placed with the employee by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. According to this same FAQ, "[f]or an individual not described in Code section 152(1)(1), such as a grandchild or niece, a plan may impose additional conditions on eligibility for health coverage, such as a condition that the individual be a dependent for income tax purposes."

A. Special Enrollment Opportunity

The May 14, 2014 Rules also require plan sponsors to provide a special enrollment opportunity to any child who may have previously "aged out" under the plan or were otherwise not eligible for coverage under the plan. Plan sponsors must provide a notice of this special enrollment opportunity. Under the DOL guidance, notice to a covered employee will be deemed to be notice to the adult child. At least 30 days must be provided for individuals to enroll and the DOL has issued "Model Language for Notice of Opportunity to Enroll in Connection with Extension of Dependent Coverage to Age 26." This notice may be found at www.dol.gov/ebsa/healthreform/

B. Tax Considerations of Expanded Dependent Coverage

Each GHP defines "child" or "dependent" for coverage eligibility and, in many cases, has conformed this definition to comply with Code Section 152. Under Code § 105(b), employer-provided health care coverage to an employee, the employee's spouse and "dependents" is not taxable. Under Code § 152, the term "dependent" falls into one of two groups: a "qualifying relative" or a "qualifying child. Under Ute ACA's amendment to Code § 105(b), which was effective March 23, 2010, employer-provided health care provided to the employee's "child" under age 27 will be excluded from the employee's gross income.

The IRS issued Notice 2010-38, which provides guidance on the tax treatment of employer-provided coverage to a taxpayer's child under age 27. "Children" that are eligible for tax-free coverage are defined in Code § 152(1)(1) that are the employee/participant's son or daughter, stepson or stepdaughter, persons that are legally adopted by or lawfully placed with the employee for legal adoption or an eligible foster child can be provided the coverage on a tax-fee basis. This Notice clearly states that the exclusion from income applies to any "child" of the employee who has not turned age 27 at any time during the employee's tax year, including a child that is not the employee's dependent under Code § 152(a). This means that the age limit, residency, support and other tests included in Code § 152(c) do not apply for purposes of the exclusion from income provisions of Code § 105(b). The exclusion from the employee's income only applies if the adult child is still age 26 at the end of the tax year. The Notice also confirms that, although not clear under the ACA, this same income exclusion will apply to employer provided accident and health plans under Code § 106, and health reimbursement arrangements or HRAs.

Notice 2010-38 also provides that coverage for or reimbursements to an employee's adult child under age 27 may be made under a cafeteria plan (including a health flexible spending account) and that regulations under Code § 125 will be amended, retroactively to March 30, 2010, to include change in status events affecting non-dependent children under age 27. The Notice further clarifies that the value of this extended coverage is excluded from wages for purposes of FICA and FUTA and that the covered adult child is deemed to be a dependent for these purposes.

While the ACA does not specifically address the premiums or costs that may be charged for the coverage of children under the age of 27 who are no longer tax dependents, the May 14, 2010 Rules provide that the adult child or parent/employee cannot be required to pay more for the coverage than for other dependent children. An additional charge cannot be made based upon the age of the child. However, it would be permissible for a plan to provide coverage and charge a premium based upon the number of dependents covered (i.e. employee plus spouse coverage would be employee + 1, employee plus spouse and a child would be employee +2, etc.).

A BENEFIT PRACTITIONER'S COMMENT:

The regulation of group health care plans by the federal government began with the favorable tax treatment of employer-provided health insurance under the Internal Revenue Code. Then there was Medicare, which is not a program many individuals would like to see eliminated. The enactment of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (COBRA), requiring group health care plans to provide continuation coverage to "qualified beneficiaries" after "qualified events," represented a major step toward reform of the U.S. health care system. COBRA was followed by the Health Insurance Portability and Accountability Act or HlPAA in 1996, which (although not mentioned prominently in the Health Reform debates) went a long way toward eliminating pre-existing condition exclusions. HlPAA was followed by a number of other federal laws regulating coverage under employer-sponsored health care plans. States have enacted mini-COBRA laws both requiring continuation coverage for small plans not subject to Federal COBRA and laws requiring insured programs to cover older children. Clearly, the ACA will provide both challenges as well as opportunities to a number of different interested groups: insurance companies, providers of health care, employers who are plan sponsors, and individuals. However, contrary to the "sound bite" sometimes heard regarding Health Care Reform being a "government takeover of health care," the ACA is not the government's first involvement in the regulation of employer-sponsored group health care. Many of the ACA mandates, including the adult child mandate, discussed above, will be very popular and therefore, not likely to be repealed.

© 2010 Sarah Lockwood Church and Joni Landy. All Rights Reserved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.