• IRS Issues Guidance to Clarify Health Care Reform Coverage of Adult Children
  • May 4, 2010 | Authors: Lisa M. DeFilippis; Joseph J. Lazzarotti; Melissa K. Ostrower; Monique Warren
  • Law Firms: Jackson Lewis LLP - Cleveland Office ; Jackson Lewis LLP - White Plains Office ; Jackson Lewis LLP - New York Office ; Jackson Lewis LLP - White Plains Office
  • The Internal Revenue Service has released guidance concerning how employers can deal with changes made by the recent health care reform laws in the coverage of adult children.  Apparently, the IRS is trying to encourage group health plans and health insurance issuers to provide dependent coverage to adult children until age 27 immediately.  This guidance is contained in Notice 2010-38, released April 27, 2010.

    The health reform laws (i.e., the Patient Protection and Affordable Care Act of 2010 and Health Care and Education Reconciliation Act of 2010), as a technical matter, have a glitch in how the favorable income tax treatment for the coverage of adult children will be applied and be effective.  For these purposes, an adult child includes a son, daughter, stepchild, adopted child or eligible foster child under the age of 27 in the relevant taxable year. The child need not be a dependent for tax purposes.  The Notice is the IRS’s attempt at bridging this glitch by administrative action.

    Exclusions from Income Maintained

    The Notice confirms that the IRS will administer these new favorable tax provisions, effective March 30, 2010, so that both (i) employer-provided reimbursements for adult children under an employer medical care plan for adult children are excluded from the parent-employee’s income under Section 105(b) of the Internal Revenue Code and (ii) the value of the coverage for that adult child will also be excluded from gross income under Section 106 of the Internal Revenue Code.
    In addition, the Notice confirms that these benefits are not considered wages for FICA and FUTA purposes.

    Cafeteria Plan Elections

    In order for employers to allow employees to make changes to their cafeteria plan elections to pay for the additional cost of adding adult children to a plan immediately, the Notice provides that a cafeteria plan may permit an employee to revoke an election during a period of coverage and to make a new election as a result of a change-in-status event affecting an adult child, including a child becoming newly eligible for coverage or eligible for coverage beyond the date on which the child otherwise would have lost coverage.

    The Notice includes a special rule that employers may permit employees to make pre-tax salary reduction contributions for accident or health benefits under a cafeteria plan for an adult child now, even if the plan has not yet been amended to cover such individuals.  However, the plan amendment must be made by December 31, 2010, and be effective retroactively to the first day when employees were permitted to make such contributions (but not before March 30, 2010).  The Notice also provides that employers may rely on the employee’s representation as to a child’s date of birth.