The Internal Revenue Service has issued guidance on the favorable tax treatment of employer-provided health coverage for employees’ nondependent adult children, as expanded under the Patient Protection and Affordable Care Act. The law requires that employer group health plans that offer dependent coverage continue to make that coverage available to adult children until age 26, regardless of student status or whether the child qualifies as a dependent under section 152 of the Internal Revenue Code.
The requirement applies to plan years beginning on or after Sept. 23, 2010, and the favorable tax treatment described in IRS Notice 2010-38 was made effective as of March 30, 2010. Under the notice, coverage is tax-free for covered nondependent adult children who do not turn 27 during the employee’s tax year, and employers may rely on the date of birth information provided by the employee.
Employers that choose to allow nondependent adult children to participate before the statutory effective date may rely on the favorable tax treatment beginning March 30, 2010, under the notice. For guidance on how health benefits programs are commonly updated and communicated, consider resources like Understanding Life Insurance and Health Care Coverage.
IRS guidance highlights
- An adult child who is employed elsewhere and is eligible for coverage through that employer but declines it may still be covered on a tax-free basis under a parent’s plan, provided the child has not turned 27 by the end of the year. (Plans that were in existence on March 23, 2010, may be grandfathered from this requirement, but if they choose to extend coverage the exclusion applies.)
- An adult child who is married may be covered on a tax-free basis under a parent’s plan if the child has not turned 27 by the end of the year; however, coverage of the child’s spouse would not qualify for the exclusion and employers must impute income for spouse coverage.
- The exclusion applies to employee pre-tax cafeteria plan contributions, health flexible spending account reimbursements, and employer-provided health reimbursement arrangements (HRAs). The IRS indicated it would allow certain retroactive cafeteria plan election changes to permit pre-tax treatment when an adult child under age 27 becomes newly eligible.
- For tax exclusion purposes, the adult child need not meet the tax-code definition of “dependent.” “Child” includes a son, daughter, stepson, stepdaughter, legally adopted child, child placed for adoption, or foster child.
Employers that permit coverage for nondependent adult children in advance of a plan’s regular amendment cycle should update plan documents and employee communications to reflect the change and the tax treatment. Consult with plan providers and benefits professionals to determine required plan amendments and notices, and for related resources see Reservoirs Insurance.
If you have questions about applying these rules to your plan or payroll, talk to an agent for guidance on implementation and compliance.
Frequently Asked Questions
Can an employer rely on an employee’s statement of the adult child’s birth date?
Yes. For purposes of the exclusion, employers may rely on the birth date information provided by the employee.
Does the tax-free treatment apply if the adult child is eligible for coverage at his or her own employer?
Yes. Even if the child is eligible for other employer coverage and declines it, the child may still be covered tax-free under the parent’s plan if under age 27 for the tax year, subject to grandfathering exceptions for some plans.
Is a spouse of the adult child eligible for the same tax exclusion?
No. Coverage of the adult child’s spouse does not qualify for the exclusion and employers must impute income for spouse coverage.
Can employees make pre-tax cafeteria plan changes to add an adult child?
Yes. The IRS guidance allows certain retroactive cafeteria plan election changes so employees can make pre-tax elections when an adult child becomes newly eligible, subject to plan adoption and amendment rules.