Agencies Provide Guidance With Regard to Requirement to Extend Coverage to Adult Dependent Children

5/17/2010

By John Hickman, Esq. and Ashley Gillihan, Esq., Alston & Bird, LLP

The agencies (Treasury, Labor, and HHS) issued regulations yesterday regarding PPACA's new requirement on group health plans that offer coverage of dependent children to extend coverage to children up to age 26. This rule applies to health coverage (including grandfathered plans) other than HIPAA excepted benefits.

The following is a brief overview of the regulations:

"Terms of eligibility": Plans may only define "dependent child" by reference to the relationship between the child and the participant--at least until the child is age 26. Factors that may no longer be used are: (i) student status (ii) residency (iii) financial dependency (iv) employment (v) eligibility for other coverage [except that grandfathered plans may, until the first plan year beginning on or after January 1, 2014, restrict eligibility to children who are NOT eligible to enroll in an employer sponsored health plan other than an employer sponsored plan of the parent]. The following are a few key issues related to this rule:

The regulations make no distinction between minor and adult children. Therefore, the same rules apply regardless of age until age 26.

The plan's terms may not vary with respect to such child based on age. Thus, additional surcharges may not be added based solely on the age of the child. For example, if the plan's coverage levels are employee and family and the employee already has family, then adding an adult child may not result in an additional premium. However, premium surcharges are permitted, even for an adult child, if based solely on the number of individuals covered. Many companies are considering converting the current "single/family" coverage categories to "employee plus 1, employee plus 2, plus 3" etc. to limit potential adverse selection.

Coverage may end on the day before the child's 26th birthday. However, plans that wish to extend coverage beyond that date (e.g. through the end of the plan year in which the child turns age 26) may do so on a tax-free basis (in accordance with PPACA and Notice 2010-38) to the extent coverage does not extend into a year in which the child will turn age 27.

Unlike the expansion of the definition of tax dependent under Code Section 105(b), which defines "child" by reference to Code Section 152(f)(1), the regulations do not define "child." For convenience, we have reprinted our prior advisory on the tax exclusion below.

For grandfathered plans, it isn't clear whether eligibility for other "employer sponsored health plan" means eligibility as an employee or otherwise. The fact that the regulations indicated that grandfathered plans could deny coverage to a child who is eligible for an employer sponsored health plan other than a group health plan of the parents suggests that eligibility for an employer sponsored plan as a "dependent" under a plan other than the parent's plan (e.g. a spouse) could permit a plan to decline to offer coverage.

Impact of plan change on grandfathered status: The agencies believe that guidance expected to be released in the near future regarding grandfathered health plans will clarify that changes made to comply with this law and/or voluntary compliance with the law (e.g. implementing the rule earlier than otherwise required) will NOT affect grandfathered health plan status.

Transitional rule: Children who previously lost coverage under the Plan due to loss of dependent status or who were never enrolled because they were not eligible must be provided a "special enrollment" opportunity to the extent now eligible under the new rules. The enrollment period must be at least 30 days in duration and begin no later than the first day of the plan year beginning on or after September 23, 2010. Plans may use their existing annual enrollment periods to satisfy this requirement. The following are a few other key elements of this rule:

Coverage must be effective on the first day of the plan year beginning on or after September 23, 2010, even if the enrollment is requested after that date (e.g. the plan's special enrollment period extends beyond the first day of the plan year).

Notice of the enrollment period may be provided to the employee.

It is treated like a "special enrollment." Thus, employees who are eligible, but not enrolled, must be permitted to enroll as well and all benefit package options made available to similarly situated individuals must be offered.

These regulations are effective 60 days after publication in the federal register (which as of May 16, 2010 had not yet occurred); however, the regulations will be effective well in advance of the first date that the rules will begin to apply to group health plans. Comments may be submitted within 90 days after publication in the federal register.

NOTE: Although not specifically addressed in the regulations, the above mentioned rules do not appear to apply to "excepted benefits" as defined by HIPAA. Thus, non-integral dental and vision plans, and other excepted benefit coverages such as most Health FSAs, do not have to comply with this rule.

Categories: General, HSA, HRA, FSA, COBRA