IRS Issues Regulations on Age 26 Dependent Coverage Rule

Late on May 11, 2010, IRS issued interim final regulations related to the new age 26 dependent coverage rules under the Patient Protection and Affordable Care Act. The age 26 rule has been a source of frequent discussion and evolving guidance since the health care reform bill became law in March. The statute requires that a group health plan that makes available dependent coverage of children, must make this coverage available for children until they reach age 26. Still, group health plans have had many questions about whether subsequent regulation might change their plans' definition of "dependent." In light of the new interim final regulations (Reg. § 54.9815-2714T), applicable to plan years beginning on or after September 23, 2010, we can answer that question with a resounding "yes."  We can now say that IRS has interpreted the age 26 rule much broader than most benefits professionals expected when the health care reform bill became law.

Plans Probably Must Change
Definition of "Dependent." 
Currently, many group health plans that provide dependent coverage limit that coverage to health coverage excludable from employees' gross income for income tax purposes. However, conditioning coverage on whether a child is a tax dependent is no longer permissible. Accordingly, the interim regulations provide that a group health plan offering group health insurance coverage to dependents, must make that coverage available to dependent children until they reach age 26.

The interim regs explain that plans or coverage may not impose the requirements for tax dependents to deny dependent coverage to children-adult or minor. Accordingly, for children who have not reached age 26, a plan or issuer may not define "dependent" for purposes of eligibility for dependent coverage of children other than based on a parent/child relationship. Examples of factors that may not be used for defining dependent for purposes of eligibility include financial dependency on the participant (or any other person), residency with the participant (or any other person), student status, employment, eligibility for other coverage, or any combination of these factors.

It is also prohibited for the terms of the plan or health insurance coverage for dependent coverage to vary based on the age of the child (except for children age 26 or older). For example, a plan may not impose an additional premium surcharge for children who are older than age 18. Nor may a plan limit coverage options for children above a certain age, where other children are entitled to other options.

Remember that a plan is not required to make coverage available for the child of a child receiving dependent coverage.

The regs also make clear that the age 26 rule applies to all group health plans and health insurance issuers (whether or not the plan or health insurance coverage qualifies as a "grandfathered health plan") for plan years beginning on or after September 23, 2010.

However, for plan years beginning before January 1, 2014, a grandfathered health plan that is a group health plan that makes available dependent coverage of children may exclude an adult child who has not reached age 26 from coverage if the child is eligible to enroll in an employer-sponsored health plan, other than a group health plan of the parent. For an adult child who is eligible for coverage under the plans of both parents' employers, neither plan may exclude the adult child from coverage based on the fact that the adult child is eligible to enroll in the other parent's plan.  Before relying on the status of your plan as one that is "grandfathered" we must first receive guidance from IRS as to exactly which plans will be "grandfathered" and under what circumstances a plan might lose such status.

New Enrollment Opportunity. 

The new interim regs provide transitional relief to any child who-
(i) has lost coverage, was denied coverage, or was not eligible for coverage, under a group health plan or group health insurance coverage, because, under the terms of the plan or coverage, dependent coverage ended before the child reached age 26; and
 
(ii) becomes eligible (or is required to become eligible) for coverage on the first day of the first plan year beginning on or after September 23, 2010.  The interim regulations require a plan or issuer to give such a child an opportunity to enroll - including written notice of the opportunity - which must continue for at least 30 days, regardless of whether the plan or coverage offers an open enrollment period, and regardless of when any open enrollment period might otherwise occur. This enrollment opportunity (including the written notice) must be provided not later than the first day of the first plan year beginning on or after September 23, 2010.

If a child is enrolled under the transitional rule, coverage must begin not later than the first day of the first plan year beginning on or after September 23, 2010, even if the request for enrollment is made after the first day of the plan year.

Under these rules, if a plan has more than one benefit package option, a child is qualified for enrollment under the interim regs, and the parent is enrolled in one benefit package option, the plan must provide an opportunity to enroll the child in any benefit package option for which the child is otherwise eligible (allowing the parent to switch benefit package options). Under the interim regs, if a child qualifies for an enrollment opportunity and the parent is not enrolled, the plan must provide an opportunity to enroll the parent in addition to the child.

The written notice that must be provided to an eligible child (see above) may be provided to an employee on behalf of the child. For a group health plan, the notice may be included with other enrollment materials that a plan distributes to employees, provided the statement is prominent. If a notice satisfying these requirements is provided to an employee whose child is entitled to an enrollment opportunity, the obligation to provide the notice of enrollment opportunity with respect to that child is satisfied. 

We expect further guidance from IRS on many of the provisions of the health care reform law that take effect with new plan years occurring on or after September 23, 2010.  Stay tuned.  If you have questions about these new interim final regulations, please contact your LMV attorney at (205) 326-3002.
To read the IRS Interim Guidance, click here.