Two of the provisions in the health care reform act are causing substantial confusion. They sound similar, but are really two different things: the first is a coverage mandate; the second is a tax exclusion.
The Patient Protection and Affordable Care Act (“PPACA”) enacted on March 23, 2010 contains a mandate that, effective with the first plan year beginning on or after September 23, 2010, all group health plans that provide coverage to an employee’s child must provide such coverage until the child’s 26th birthday, regardless of the child’s marital status, residency, student status or financial dependence on the employee. The first agency guidance on this mandate was published on May 13, 2010.
This coverage mandate is often confused with the provision in the Health Care and Education Reconciliation Act (“HCERA”) enacted on and effective on March 30, 2010, which expands the tax exclusion for employer-paid coverage of an employee’s child to the end of the calendar year in which the child has not yet attained age 27. Put another way, the exclusion applies to the end of the calendar year in which the child attains age 26. The first agency guidance on this tax exclusion was published on April 27, 2010, in IRS Notice 2010-38, http://www.irs.gov/pub/irs-drop/n-10-38.pdf
The coverage mandate applies to “group health plans” including health reimbursement accounts (“HRAs”). However, it does not apply to “HIPAA-excepted” benefits, such as non-integral dental and vision plans, and other excepted benefit coverages such as most Health FSAs. Nevertheless, the favorable tax treatment does apply to dental, vision and health FSAs, even though they are not required to comply with the coverage mandate, so plan sponsors may wish to expand their eligibility provisions anyway.
Sponsors of health FSAs may wish to amend their plans to permit participants to request reimbursements for children up to end of the year in which the child attains age 26. Although retroactive amendments to cafeteria plans are generally not permitted, Notice 2010-38 specifically allows an amendment retroactive to March 30, 2010 for these purposes. The Notice also permits employers to amend their plans to allow employees to change their FSA elections mid-year in light of the expanded eligibility for adult children. These amendments must be adopted by December 31, 2010.
One last note: Neither the health reform acts nor IRS Notice 2010-38 amended the definition of “dependent” for purposes of “qualifying medical expenses” eligible for tax-free reimbursement under a health savings account (“HSA”). The prior rules apply for this purpose.