Agencies Issue Interim Final Rule on Adult Child Coverage Extension Under PPACA

On May 10, 2010, the Departments of Treasury, Labor and Health and Human Services issued an Interim Final Rule to implement the Patient Protection and Affordable Care Act (PPACA) mandate extending coverage of adult children under group health plans until age 26. PPACA requires that, effective for plan years beginning on or after September 23, 2010 (January 1, 2011, for calendar year plans), a group health plan that offers dependent coverage must continue such coverage for an employee's adult child until the child turns 26 years old. The Interim Final Rule defines who is covered for purposes of this new mandate, provides for a transition rule for adult children who become eligible for coverage by reason of the new mandate, and requires plans to offer uniform terms of coverage for all children until age 26 who are covered under the plan.

PPACA's New Coverage Requirements

The Interim Final Rule provides that a group health plan that offers dependent child coverage can only define "dependent" for purposes of eligibility for coverage of dependent children in terms of the relationship between the child and the participant. Although neither the PPACA nor the Interim Final Rule defines the term "child" for purposes of this requirement, to avoid imputed taxes group health plans will presumably define "child" to include the son, daughter, stepchild, adopted child (or child placed for adoption) or eligible foster child of the taxpayer. The Interim Final Rule further makes clear that group health plans that offer dependent coverage must cover both married and unmarried children until age 26, but are not required to cover the spouse or child of such children.

Many group health plans base dependent eligibility on the definition of a dependent under Internal Revenue Code (Code) Section 152. Code Section 152 outlines a number of criteria that must be satisfied to achieve dependency status, such as financial dependency, residency requirements, and full-time student status for older children. These types of restrictions are no longer permitted with respect to children under age 26 beginning with the first plan year on or after September 23, 2010 (January 1, 2011, for calendar year plans). However, if a group health plan covers dependent children after age 26, the plan may continue to restrict the eligibility of such individuals based on residency, support, or other factors.

Most group health plans that offer dependent coverage do not define a dependent as broadly as the PPACA and the Interim Final Rule require. The most recent federal law impacting many group health plans' dependent eligibility provisions was Michelle's Law, which mandates continued coverage for dependent students while on medically necessary leaves of absence from school. It is not yet clear how or if Michelle's Law will continue to apply in light of the broader changes made by the PPACA and the Interim Final Rule, which require dependent children up to age 26 to be offered coverage under a group health plan without regard to full-time student status. In any event, employers need to be prepared to amend their eligibility provisions for compliance before their next plan year, or earlier if an employer wishes to implement this mandate before its effective date. The commentary to the Interim Final Rule states that guidance relating to grandfathered group health plans is forthcoming and that such guidance is expected to make clear that a group health plan will not lose its grandfathered status because it is amended to comply with this provision of the PPACA and this Interim Final Rule, including voluntary early compliance.

Special Rule for Grandfathered Group Health Plans

In general, a group health plan that offers dependent child coverage cannot deny or restrict coverage to children who have not attained age 26 even if the child is eligible for other coverage. However, there is an exception to this rule that applies to grandfathered plans (generally, a grandfathered plan is a group health plan that was in existence on March 23, 2010). For plan years beginning before January 1, 2014, a grandfathered plan may exclude from coverage an adult child under age 26 if such child is eligible to enroll in an employer-sponsored health plan other than a group health plan of a parent. Thus, if an adult child is eligible for coverage through his or her own employer, or the employer of his or her spouse, the grandfathered group health plan need not extend adult child coverage to that individual. If an adult child is eligible for both parents' group health plans, neither plan may deny coverage to the child, regardless of either plan's grandfathered status. For plan years beginning after 2013, grandfathered plans may not exclude adult children based on eligibility for other employer coverage.

Separate Coverage Treatment for Adult Dependents Prohibited

Prior to issuance of the Interim Final Rule, there were several open questions related to whether a group health plan would be able to charge higher or different premiums for adult children or limit the benefit options available to adult children. The Interim Final Rule answers those questions with a clear "no." A group health plan that offers dependent coverage cannot vary the terms of that coverage, including the cost of the coverage, based on the age of the dependent child who has not attained age 26. For example, a plan that charges higher premiums to dependent children who are older than age 18 would violate the Interim Final Rule. On the other hand, a plan that increases premiums for coverage of additional dependents regardless of their age (e.g., self-only, self-plus-one, self-plus-two, self-plus-three-or-more) would not violate the Interim Final Rule.

Transitional Rule for 2010

The Interim Final Rule requires group health plans offering dependent coverage to provide an enrollment opportunity for employees to enroll their adult children who are currently ineligible for coverage due to their age, but who will become eligible when the PPACA provision takes effect. The enrollment opportunity must be provided to any child who previously lost coverage, was denied coverage or was never eligible for coverage under the plan because the availability of dependent coverage of children under the plan did not extend to age 26. This opportunity to enroll must be available for at least 30 days, regardless of whether a plan holds an open enrollment period (although providing the opportunity during open enrollment for the next plan year will satisfy this requirement as long as the enrollment period for adult children is open for at least 30 days), and regardless of whether the child's parent is currently enrolled in the plan.

Employers must provide both the opportunity to enroll and notice to employees of the enrollment opportunity no later than the first day of the first plan year beginning on or after September 23, 2010. The notice can be provided to the employee on behalf of the employee's child and may also be included with other enrollment materials that a plan distributes to employees, provided the statement relating to the opportunity for adult children to enroll is prominent. The adult child of an employee who takes advantage of this enrollment opportunity must be treated as a special enrollee, and, therefore, offered all of the benefit packages available to similarly situated individuals and at the same cost. The child's coverage must be effective as of the first day that the PPACA provision takes effect for that plan (January 1, 2011, for calendar year plans). If a child of an employee has an opportunity to be enrolled during this transition, the plan must also permit the employee to enroll if not already enrolled, or to switch to a different benefit package, if desired.

Tax Relief for Plans Covering Adult Children Already in Effect

On April 27, 2010, the Internal Revenue Service (IRS) issued Notice 2010-38 to provide related guidance on the tax treatment of health coverage for adult children under age 27 who are covered under a parent's employer health plan. The Notice provides that, effective March 30, 2010, employers no longer have to impute income to employees for the health coverage of such children, even though they are not tax dependents under the Internal Revenue Code. The Notice also expands coverage under health flexible spending arrangements. For more information regarding the tax relief associated with the requirement to extend dependent coverage under PPACA, please read our Health Care Reform alert, "IRS Issues First Guidance on Coverage of Adult Children Under PPACA."

For more information regarding the new dependent coverage rules under PPACA, or for any other questions regarding how health care reform impacts group health plans, please contact Christopher Sears, Tara Sciscoe, Katrina Clingerman, Shalina Schaefer or the Ice Miller employee benefits attorney with whom you work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.