Employer Health Reform Issues Brief: Extension of Dependent Coverage to Age 26
Smart first steps for employers
Employer-sponsored health plans that provide coverage for employees’ children will be required to continue covering employees’ children up to age 26, regardless of full-time student or marital status. A separate provision allows this coverage to be provided on a federal tax-exempt basis to any child until the year of the child’s 27th birthday. Employees can pay their share of premiums for covering these children with pre-tax money through a cafeteria plan effective retroactively to March 30, 2010, as long as the plan is amended to permit this by December 31, 2010.
While there is no longer a need to impute income for federal income tax purposes for the new coverage, some states may still require imputed income for state income tax purposes.
Until 2014, employers with grandfathered plans – essentially any plan in existence on March 23, 2010 – have the option of excluding employees’ adult children if they are eligible for coverage under another employer’s plan.
Effective Date: The coverage requirement is effective for plan years beginning on or after September 23, 2010 (six months after enactment of the health reform law). The federal tax law changes are effective as of March 30, 2010.
Key Implication: Cost
Employers will experience additional costs as the pool of eligible dependents expands. Adverse selection likely will exacerbate this problem, at least until the individual mandate becomes effective in 2014. The amount of the cost increase will vary, depending on each employer’s demographics and plan provisions. The employer cannot put any restrictions or impose any premiums on coverage for these adult children that do not apply to other dependents.
Key Implication: Administration
Employers are required to offer employees’ children who are not yet age 26 the opportunity to enroll if they previously lost coverage – or were denied coverage – under the plan’s terms. In addition, employees who are not currently in the plan who have children that could enroll under these rules must be given the opportunity to enroll with their children. Written notice of this opportunity to enroll must be given on or before the first day of the first plan year beginning on or after September 23, 2010 (i.e., January 1, 2011 for calendar year plans), and the enrollment period must remain open for at least 30 days. If elected, coverage must be effective as of the first day of the first plan year beginning on or after September 23, 2010.
Key Implication: Communications
The change in dependent eligibility will affect both employee communications and compliance documents. Employers will need to:
- Communicate the new dependent eligibility rule to all employees, and the special enrollment opportunity to affected employees.
- Update health care eligibility rules in all plan documents, SPDs, open enrollment materials and related websites.
- Explain different definitions of dependent eligibility that may be used for other employee benefit plans.
Smart First Steps for Employers to Consider
Cost: Employers may wish to re-evaluate their contribution methodologies, particularly contribution “spreads” across coverage tiers, as tiers with children may become significantly more expensive. A complete view of all short-term and long-term Health Reform cost impacts should be considered.
Administration: Employers should assess the impact of all Health Reform provisions on administrative processes and develop a strategy for implementing those changes within the prescribed timelines.
Communications: Employers should take into account all Health Reform provisions and develop a comprehensive communications strategy. This will help employees understand how Health Reform impacts them and help address all compliance requirements.
As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.