The IRS recently announced that as a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee’s children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010. These changes immediately allow – but does not require – employers to permit employees to begin making pre-tax health care contributions to pay for this expanded benefit. Currently, the age at which young adults lose parental coverage varies widely. Most plans cover dependents until they graduate from college, but many kids don’t go to college. An estimated 485,000 young adults would gain coverage from the provision, a much touted early benefit of health care reform.
Extended Coverage Via Tax-Free Employer-Provided Health Insurance Now Available for Children and Young Adults Under Age 27
Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.
IRS Notice 2010-38 which details these changes, says that company’s and plan sponsors then have until the end of 2010 to amend their employee health care plans language to incorporate these rules and tax changes. Search health plans with the updated insurance provisions at eHealthInsurance.
In addition to changing the tax rules as described above, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended pre-tax coverage must be provided not later than plan years beginning on or after Sept. 23, 2010. However, for most company plans, the new plan year doesn’t start until Jan. 1, 2011. That means some young adults currently insured could experience a break in coverage
Price increases with extended coverage are possible. Even if the timeline for the new benefit are getting clearer, it’s still far from clear how employers and insurers will price the new coverage. They could spread the cost across their entire pool of employees with family coverage. Or they could charge families that elect to cover their young adults a separate premium, which would be noticeably higher. There could be considerable differences in costs as more people for a longer time are covered under family plans.
MSNBC reports that, major national insurers announced they would move up the effective date of the extension so recent graduates or those with a birthday in 2010 don’t experience a break in coverage. The industry acted after Health and Human Services Secretary Kathleen Sebelius worked behind the scenes to encourage individual companies to make the change. But the insurers’ announcement applied mainly to policies they sell directly to customers, not to plans run by employers – the primary sponsors of private health insurance. And under the health care overhaul law, there may be a lag in when employers start to offer the new benefit.