IRS Notice: Tax-Free Medical Coverage to Dependent Adult Children
A Special Alert from Palmieri & Eisenberg (P&E):
On April 27, 2010, the IRS issued Notice 2010-38. This Notice is the first round of guidance by the IRS under the new healthcare reform legislation, generally referred to as the Patient Protection and Affordable Care Act (“PPACA”).
In the guidance the IRS explains that employers may provide tax-free medical coverage to children up to age 27. This tax-free guidance should not be confused with the new healthcare requirement to provide coverage to dependent children up to age 26 (i.e., until their 26th birthday). The PPACA changes to the Public Health Service Act (“PHS Act”) do not parallel the changes to the Internal Revenue Code (the “Code”)
More specifically:
· The PHS Act extends coverage to children up to age 26 effective for plan years beginning on or after September 23, 2010.
· The Code creates an income tax exclusion for children under age 27 as of the end of a taxable year, effective as of March 30, 2010.
Important issues to consider include the following:
· The new tax exclusion applies to coverage provided on or after March 30, 2010. Accordingly, coverage prior to March 30, 2010 is subject to taxation if an individual does not qualify as a dependent under the Code, in the same manner as income is “imputed” for domestic partners.
· The exclusion only applies to coverage in the tax year “before” the child turns age 27. Thus, if a child turns age 27 in 2011, the tax exclusion ceases to apply effective as of December 31, 2010.
· Changes will be permitted under Flexible Benefit Plans (“Flex Plans”) to allow employees to pay for the cost of existing or new coverage on a pre-tax basis even if Flex Plans are not immediately amended to allow “mid-year” changes in status.
· Employers will have until December 31, 2010 to amend their Flex Plans. P&E anticipates preparing all necessary amendments when we amend client Flex Plans to also exclude over the counter (“OTC”) prescription drugs for 2011, except where such OTC drugs are prescribed by a physician or are for insulin.
As indicated in prior P&E Alerts, some insurance carriers are implementing dependent age 26 coverage prior to 2011. However, coverage is being implemented inconsistently between various carriers. For example, we understand some carriers (i.e., CIGNA) are allowing coverage for dependents up to age 26 for new hires in addition to continuing coverage for those dependents that would have aged out due to loss of full-time student status. Other carriers (such as United Healthcare) appear to only cover dependents that are currently graduating college. Therefore, employers who maintain multiple health plans may wish to wait until January 1, 2011 to introduce consistent coverage for adult children up to age 26.
P&E is carefully monitoring all healthcare guidance and will continue to keep you apprised of all changes. Frank Palmieri will be meeting with representatives of the IRS and DOL on May 5 and 6, 2010, as part of the American Bar Association and will report back any new developments.
Mr. Palmieri will also be serving on a Blue-Ribbon Panel of experts at EANJ’s May 19th Annual Meeting. Click here for details:
