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2010 Health Care Act: New Dependent Coverage Obligations and Expansion of Tax Dependent Status

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March 30, 2010

The recently-enacted health care reform legislation (“Health Care Act”) contains a number of important health care reform measures  that will take effect over time.  Two rules affecting employers under the Health Care Act are the addition of new dependent coverage obligations, and the expansion of tax-free dependent coverage under the Internal Revenue Code.  The expanded tax rules in particular will have immediate impact for Illinois employers who are already offering adult dependent coverage under Public Act 95-0958.

New Dependent Coverage Obligations

Under the Health Care Act, any group health plan that provides coverage of dependent children must continue to make dependent coverage available for an adult child until the child turns 26 years of age.  While governmental employers and private employers with fully insured plans in Illinois were already required to offer this young adult-dependent coverage under Public Act 95-0958 (See our prior bulletin on the Illinois Dependent Coverage Law), the Health Care Act expands this coverage requirement to all group health plans.  This new coverage rule will be effective for plan years beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans).  However, for grandfathered group health plans, coverage will not have to be offered to an adult child eligible for coverage under another employer-sponsored health plan until 2014.  Further regulatory guidance is expected in the future on what constitutes a “grandfathered” group health plan.

Expanded Tax-Free Dependent Coverage

Employees, their spouses and their qualified dependents may receive tax-free health insurance coverage from an employer.  Under prior law, qualified dependents generally included qualifying relatives of any age, and qualifying children who were either under age 19 or full time students under age 24.  Under the Health Care Act, Congress amended the Internal Revenue Code to extend tax-free health coverage to any child of an employee who has not attained age 27.  Therefore, the definition of qualifying child is significantly expanded to: (1) relax the age requirement and (2) remove the full-time student requirement.  This tax change takes effect immediately.

In the Health Care Act, Congress only amended Section 105 of the Code, which governs health care reimbursements and benefit payments.  However, the Joint Committee Report states that the “change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child.”  In addition, since 2004 the IRS has taken the position that the definition of dependent for purposes of premium payments under Section 106 is the same as the definition of dependent for health care reimbursement purposes under Section 105.  Therefore, we expect the same expanded definition of dependent to apply to health care premium payments under Section 106 of the Code. 

Further regulations and official guidance are expected on both of these new rules in the next several months.

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