 |
|
 |
|
|
|
|
|
 |
|
|
|
|
|
Know a Young Adult Who Needs Health Coverage? Or Have Employees Who Do?
Angela Bailor, MPAcc, CPA
Manager, Tax Practice
May 3, 2010
Two million young adults are poised to gain access to health insurance through their parents' health care plans as a result of this year's health reform legislation. Some are students or unemployed and looking for work in a tough job market. Others are working, but lack health insurance benefits from their employers. Taken together, they comprise the nearly 30 percent of people in their 20s that lack health insurance.
Most young adults lose coverage under the family's health insurance plan at age 19 or upon graduation from high school or college--although some states mandate longer coverage. This year's Patient Protection and Affordable Care Act--including amendments passed by Congress through reconciliation--requires that adult children under the age of 26 be allowed to continue coverage under their parents' insurance plans.
A related provision extends the tax rule that excludes the cost of coverage or reimbursements for medical coverage from gross income. The cost of coverage for children under the age of 27 is now excluded. (Note that the age limits for these two provisions differ.)
According to IRS Commissioner Doug Shulman, "These changes give employers a unique opportunity to offer a worthwhile benefit to their employees... We want to make it as easy as possible for employers to quickly implement this change and extend health coverage on a tax-favored basis to older children of their employees."
Although many of the details of the new legislation are not yet well understood or await the development of final regulations to implement them, the general provisions are as follows.
Extension of Dependent Coverage
Adult children under the age of 26 must be allowed to continue coverage under their parents' insurance plans. The mandate applies to group health plans and insurers that provide health coverage to group health plans, but not to self-insured plans. Significantly, the law does not require plans that do not already provide dependent coverage to begin doing so.
The new dependent coverage requirement is effective six months after the legislation was signed into law. As a result, it applies to plan years beginning on or after September 23, 2010--January 1, 2011 for calendar year plans.
There is a special provision for group health plans that were in existence as of March 23, 2010: For plan years beginning before January 1, 2014, these plans are not required to offer dependent coverage to an adult child who is eligible for health coverage under another employer-sponsored plan.
Tax Treatment of Exclusion of Health Coverage or Reimbursements
Currently, the cost of employer-provided health care coverage (or reimbursements) for employees and their families are excludable from gross income, and the self-employed are entitled to a deduction for their medical insurance costs.
The new health care legislation amends the tax code to extend this tax benefit to coverage for adult children. Beginning March 30, 2010, the medical coverage exclusion/deduction rules include coverage for children who have not turned 27 as of the end of the tax year. The exclusion applies with regard to income taxes and income tax withholding, as well as FICA and FUTA payroll calculations.
This provision pertains to coverage or reimbursements under an employer-provided health care or accident plan, cafeteria plan, flexible spending arrangement (FSA), health reimbursement arrangement (HRA), or voluntary employees' beneficiary association (VBA). For self-employed individuals, the cost of the child's insurance can be included in the deduction for health insurance coverage.
For this purpose, the term child (or children) includes a biological child, stepchild, eligible foster child, legally adopted child, and a child who is lawfully placed for legal adoption. It does not apply to a grandchild or the spouse of the child. To qualify, the child is not required to meet certain residency, support, or other dependency-related tests.
Also effective March 30, 2010, the cost of the coverage may be paid with pre-tax dollars. Under IRS Notice 2010-38, employers may now allow their employees to make pre-tax contributions for health care and accident benefits for children under 27--under a cafeteria plan or health flexible savings account. Although plan sponsors have until the end of 2010 to amend the plan language, the contributions may be made immediately.
|
|
|
|
|
|
|
|
|
|
|
|
|
