Federal Regulations Implement Reform Provisions for Dependent Coverage to Age 26

The Internal Revenue Service, the Department of Labor, and the Department of Health and Human Services recently issued joint interim final regulations implementing the coverage requirement for adult children contained in the healthcare reform laws.  These regulations, which become effective July 12, 2010, provide specific guidance for employers and group health plans implementing the requirement to extend coverage to adult children up to age 26.

Overview of the Regulations from an Employer’s Perspective
Effective with the first plan year beginning on or after September 23, 2010, group health plans that offer dependent coverage are required by reform law to extend coverage to adult children up to age 26.  As a result, the IRS, DOL and HHS are providing additional guidance regarding the implementation of this requirement.  The following is an overview of the regulations from an employer’s perspective:

1. Notification of Enrollment Right
Plans must provide written notice to adult children who become eligible to enroll as a result of the reform law no later than the first day of the first plan year beginning on or after September 23, 2010.  Notification provided to the employee satisfies the notice requirement to the employee's children.  Plans are allowed to provide the notice with other enrollment materials distributed to employees if the notice is prominent.

2. Enrollment
No later than the first day of the first plan year beginning on or after September 23, 2010, adult children must be given at least 30 days to enroll, regardless of whether the plan has an open enrollment period.  Plans can use their existing annual enrollment periods (which usually begin and end before the start of the plan year) to satisfy the enrollment opportunity requirement.  Coverage elected by the adult child must be effective no later than the first day of the plan year.  This enrollment right applies to adult children who were:

• Enrolled on the plan and aged out;
• Not enrolled on the plan; and
• Not previously eligible to enroll on the plan.

Where an insurance carrier is allowing continued coverage of adult children before being required to do so by healthcare reform law, there is no requirement to provide the enrollment opportunity for children who do not lose coverage under the plan.  For future plan years, coverage for an eligible adult child will be elected during normal enrollment opportunities under the plan. 

3. Special Enrollment Right
Employers must treat adult children who enroll in the group health plan pursuant to the reform requirement as a HIPAA special enrollee.  This has several implications for group health plans:

• All benefits available to similarly-situated individuals who did not lose coverage because of a loss of dependent status must be made available to adult children.
• If an adult child’s parent must be enrolled in order for the child to come onto the plan, then the parent must be allowed to enroll. 
• An enrolled parent must be allowed to switch benefit options.
• The adult child cannot be charged more for his or her coverage than is charged for other children who have not aged off the plan.

4. Restriction on Plan’s Eligibility Definition
The regulations prohibit plans from defining a “dependent” for eligibility purposes other than in terms of the relationship between the child and the employee.  Therefore, plans will no longer be able to define eligibility for dependents based on student, marital, residency, and/or employment status.  Plan documents that currently define eligibility in this manner will need to be amended to comply.

5. Surcharges and Varying Benefits
Examples in the regulations illustrate that surcharges for coverage of children under age 26 are not allowed except where the surcharges apply regardless of the age of the child.  Additionally, a plan is not allowed to vary benefits for children under age 26 based on the age of the child.

6. Adult Children Currently on COBRA
An adult child under age 26 who is currently on COBRA after aging off the plan whose parent is an active employee must be allowed to enroll on the plan as a regular participant.  The regulations clarify that a child who enrolls as a regular participant may again be entitled to COBRA following a loss of eligibility due to the child reaching age 26.

Clarification of Grandfathered Plan Exception
Until 2014, grandfathered plans are not required to extend coverage to an adult child if the child is eligible to enroll in employer-sponsored group health plan coverage (although there is currently no guidance as to what constitutes a “grandfathered plan”).  The regulations clarify that a child’s eligibility under either parents’ group health plan does not trigger the grandfather plan exception.  Therefore, an adult child who is eligible to enroll on both parents’ plans may not be excluded by either plan due to the child’s dual eligibility.

Additional Guidance on the Horizon for Grandfathered Plans
While the jointly-issued regulations do not provide much clarification regarding grandfathered plans, there is an indication that guidance is forthcoming.  A section in these regulations specifically states that (1) the federal agencies anticipate the publication of regulations relating to grandfathered health plans “in the very near future;” and (2) it is anticipated that those regulations will clarify that changes to a group health plan’s terms to comply with the requirement to extend coverage to adult children up to age 26, including voluntary compliance before plan years beginning on or after September 23, 2010, will not cause a plan to lose its grandfathered plan status.

Tax Implications
Additionally, the IRS has published Notice 2010-28 which addresses the new tax implications of providing health coverage for adult children up to age 26, as well as the impact on cafeteria plans, health reimbursement accounts (HRAs), and flexible spending accounts (FSAs). IRS Notice 2010-38 confirms that coverage of adult children up to age 26 is excluded from an employee’s gross income.  For a detailed overview of IRS Notice 2010-38 from an employer’s perspective, see the Compliance Alert dated May 4, 2010.

Further Information
For a copy of the jointly-issued regulations, please click here.

As additional guidance and regulations become available for healthcare reform law provisions, HCW will continue to keep you updated through our Compliance Alerts.  In the meantime, if you have any questions about healthcare reform or the reinsurance program for early retirees, please contact our office at (919) 403-1986.