Guidance issued on tax status of adult dependent health coverage

The IRS has issued its first piece of guidance on health care reform, explaining the tax treatment of adult dependent coverage under the recent federal health care reform legislation. Under the law, by the first day of the first plan year beginning on or after September 23, 2010, plans must offer coverage to the adult children of enrolled employees, up to age 26 (i.e., through the child’s 25th year). The law also provides for tax-free coverage of adult children’s medical expenses up to age 27 (i.e., through the child’s 26th year).

IRS Notice 2010-38 clarifies that the adult child’s coverage may be offered on a tax-free basis as of March 30, 2010, regardless of the fact that the adult child (up to age 27) is not a tax dependent of the employee. The adult child’s medical coverage may be offered on a pre-tax basis through the employer’s cafeteria plan. If the adult child becomes newly eligible for coverage as a result of the new law, this is a “change in status” event that allows the employee to make a mid-year change to his or her cafeteria plan election, including an election under a health flexible spending arrangement (FSA). Employers will need to amend their cafeteria plan documents to reflect this “change in status” event, but the IRS will allow the amendment to be made with retroactive effect back to March 30, 2010, as long as it is made by December 31, 2010. Finally, the Notice also affirms that medical expenses of an adult child (up to age 27) may be reimbursed through an employer’s health reimbursement arrangement (HRA). Contact your benefits adviser with questions.